MNC and Foreign Direct Investment

Multinational Corporations and Foreign Direct Investment
Sukumar Nandi Indian Institute of Management Lucknow
Issues _ Economic Integration

Outward foreign direct investment (OFDI) from the emerging economies rose from US$335billion in 1995 to US$1.4trillion in 2005 (UNCTAD, 2006: 103-104). The number of emerging economies with OFDI stocks exceeding US$5billion increased from 6 in 1990 to 27 in 2005. The technological capabilities and market share of some of the trans-national corporations (TNC) from the emerging economies has risen sharply.
IMF definition of FDI 10 percent or more of share ownership as foreign.
6/24/2012
MNC and Foreign Direct Investment
THE NATURE OF INTERNATIONAL BUSINESS Globalization International Business Conducting commercial transactions across national boundaries
Five Reasons to Pursue International Business 1. Expanded profit potential 2. Extended markets for products 3. More capital 4. Lower cost suppliers 5. Lower costs of labor
6/24/2012 MNC and Foreign Direct Investment 3
GLOBALIZATION International Business
Exporting Local products are sold abroad Importing The process of acquiring products abroad and selling them in domestic markets. Licensing one firm pays a fee for rights to make or sell another companys products. Franchising a firm pays a fee for rights to use another companys name and operating methods.
MNC and Foreign Direct Investment 4
6/24/2012
Multinational Corporations
Multinational corporations do substantial business in several countries. Multinational corporations can be controversial at home and abroad. Multinational corporations face a variety of ethical challenges. Planning and Controlling are complicated in multinational corporations. Organization is complicated structure in multinational corporations.
6/24/2012
Multinational Corporations
Multinational Corporation (MNC)
A business with extensive foreign operations in more than one county.
Transnational Corporation
A MNC that operates worldwide on a borderless basis.
6/24/2012
The world largest non-financial MNCs

($ million and number of employees
6/24/2012
MULTINATIONAL ORGANIZATIONS MNC Issues
6/24/2012
MULTINATIONAL ORGANIZATIONS MNC Issues
Protectionism Corruption
A call for tariffs and special treatment to protect domestic firms from foreign competition.
Illegal practices to further ones business interests.
Transparency International corruption scores: Indonesia Tajikistan Haiti gives these countries its poorest Nigeria Bangladesh Paraguay Myanmar
6/24/2012
MULTINATIONAL ORGANIZATIONS
MNC Issues
Sweatshops
Employ workers at very low wages, for long hours, and in poor working conditions.
Child labor
The full-time employment of children for work otherwise done by adults.

Sustainable Development, that is, development that meets the needs of the present without hurting future generations may not be satisfied by the activities of MNC.
6/24/2012
MULTINATIONAL ORGANIZATIONS MNC Issues Currency Risk The possible loss of profits because of fluctuating exchange rates.
Understanding Currency Risk in International Business U.S. exporter makes a sale in France for Euro 100,000. Scenario 1: Weak dollar .95 Euros = 1 $US Take home revenue = $105,263 Scenario 2: Strong dollar 1.25 Euros = 1 $US Take home revenue = $80,000
MULTINATIONAL ORGANIZATIONS MNC Organizations

Expatriate An employee who lives and works in a foreign country. Global Manager A person who is culturally aware and informed on international affairs.
Personal Attributes for Expatriate Success

High degree of self-awareness Cultural sensitivity Desire to live and work abroad Family flexibility and support Technical job competence
6/24/2012
12
Management Tips Criteria for choosing a partner for successful joint ventures Familiar with your firms major business Employs a strong local workforce Values its customers Has potential for future expansion Has strong local market for its own products
Has good profit potential Has sound financial standing

Foreign Direct Investment
Why is FDI increasing in the world economy? Why do firms often prefer FDI to other market entry strategies? Why do firms imitate competitors with FDI strategies?
Why are certain locations favored for FDI? How does political ideology affect government FDI policy?
What are key FDI related costs and benefits for receiving and source countries?
6/24/2012
14
Foreign direct investment (FDI): a firm invests directly in foreign facilities [ at least 10 per cent share value acquired] A firm that engages in FDI becomes a multinational enterprise (MNE) Multinational = more than one country Factors which influence FDI are related to factors that stimulate trade
6/24/2012
15

Involves ownership of entity abroad for production Marketing/service
R&D
Access of raw materials or other resource Parent has direct managerial control Depending on its extent of ownership and On other contractual terms of the FDI No managerial involvement = portfolio investment
6/24/2012
16
FDI Growth in the World Economy
FDI Flow (from all countries): from 1992 to 2002 up 292%, compared to trade up 69% and world output up 28% FDI Stock: $3.5 trillion by 1997 to greater than $8 trillion in 2009 In the year 2009
64,000 Multinational Enterprises had:

850,000 foreign affiliates 53 million employees $17.7 trillion in sales
$8 trillions global exports

Conclusion: FDI flow growing faster than world trade and world output
6/24/2012
Direction and Source of FDI

Most FDI flow has been to developed countries from developed countries Much to the US from EU, Japan
FDI increase to developing countries since 85

Much to the emerging Asian and Latin America economies Africa lagging
6/24/2012
18
Outward FDI, Top 20 Emerging Economies, 1980-2006 (US$ Millions)
Home Country
a
1980
5 541 5 970 38 545 885
1990
15 004 6 057 41 044 1 149
2000
32 333 19 276 51 946 11 154
2006
43 499 24 047 87 049 26 787
Rank(2006)
9 14 6 13
aSouth Africa Argentina Brazil Chile
Colombia
Venezuela Mexico Panama British Virgin Islands Cayman Islands United Arab Emirates China Hong Kong Korea Taiwan India Indonesia Malaysia 6/24/2012 Singapore Russia
136
23 1 632 730 .. 72 - 2 .. 148 127 13 009 78 6 305 623 -
402
1 221 2 672 3 876 875 648 14 4 455 11 920 2 301 30 356 124 86 753
2 989
7 676 8 273 10 507 67 132 20 788 1 938 27 768 388 380 26 833 66 655 1 859 6 940 15 878
9 960
11 559 35 144 21 176 123 512 40 395 11 830 73 330 688 974 46 760 113 910 12 964 17 350 27 830 117 580 156 824
20
19 11 15 3 10 18 7 1 8 5 17 16 12 4 2 19
MNC 7 808 and Foreign Direct 56 766 Investment 20 141
Capital Mobility
6/24/2012
20
Forms of FDI
FDI forms Purchase of assets: why? why not? Quick entry, local market know-how, local financing may be possible, eliminate competitor, buying problems New investment: why? why not? No local entity is available for sale, local financial incentives, no inherited problems, long lead time to generation of sales International joint-venture Shared ownership with local and/or other non-local partner Shared risk
6/24/2012
Alternative Modes of Market Entry

FDI
FDI - 100% ownership FDI < 100% ownership, International Joint Venture Strategic Alliances (non-equity)
Franchising
Licensing Exports: Direct vs Indirect
6/24/2012
22
Why FDI?
FDI over exporting High transportation costs, trade barriers
FDI over licensing or franchising Need to retain strategic control Need to protect technological know-how Capabilities not suitable for licensing/franchising
Follow few main competitors Immediate strategic responses

Pattern of FDI Explanations
International product life-cycle (Ray Vernon)

Raymond Vernon , " International Investment and International Trade in the Product Life-Cycle
Trade theory similarity

Eclectic paradigm of FDI (John Dunning) Combines ownership specific, location specific, and internalization specific advantages Explains FDI decision over a decision to enter through licensing or exports
John H Dunning, 1995. "Reappraising the Eclectic Paradigm in an Age of Alliance Capitalism," Journal of International Business Studies, Palgrave Macmillan Journals, vol. 26(3), Dunning, John H, 1973. "The Determinants of International Production," Oxford Economic Papers, Oxford University Press, vol. 25(3),
6/24/2012
Eclectic Paradigm of FDI (Dunning)

Ownership advantage: creates a monopolistic advantage to be used in markets abroad Unique ownership advantage protected through ownership e.g., Brand, technology, economies of scale, management know-how Location advantage: the FDI destination market must offer factors (land, capital, know-how, cost/quality of labor, economies of scale) that are advantageous for the firm to locate its investment there (link to trade theory) Internalization advantage: transaction costs of an arms-length relationship --licensing, exports-- higher than managing the activity within the MNCs boundaries
Government Policy and FDI

The radical view: inbound FDI harmful; MNCs Are imperialist dominators Exploit host to the advantage of home country Extract profits from host country; give nothing back Keep LDCs backward and dependent for investment, technology and jobs The free market view: FDI should be encouraged Adam Smith, Ricardo, et al: international production should be distributed per national comparative advantage An MNC increases the world economy efficiency Brings to bear unique ownership advantages Adds to local economys comparative advantages
6/24/2012
Host Country Effects of FDI Benefits Resource -transfer Employment Balance-of-payment (BOP) Import substitution Source of export increase Costs Adverse effects on the BOP Capital inflow followed by capital outflow + profits Production input importation Threat to national sovereignty and autonomy Loss of economic independence
Government Policy and FDI

Home country Outward FDI encouragement Risk reduction policies (financing, insurance, tax incentives) Outward FDI restrictions National security, BOP
Host country Inward FDI encouragement Investment incentives Job creation incentives Inward FDI restrictions Ownership extent restrictions (national security; local nationals can safeguard host countrys interests
Outward FDI From Emerging Economies

Figure 1: Outward FDI from Emerging Economies, 1980-2006
14
12
Latin America
Share in Global Stock (%) 10
Asia Asia
L America
8
6
Africa
0 Year Africa Latin America Asia Eastern Europe and Central Asia
6/24/2012
29
Outward Merger and Acquisition from Emerging Economies
Figure 2: Outward M&A's from Emerging Economies, 1987-2006

14
12
10 Share in the World (Percent)
Asia
L
2
America
Africa
0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year Africa Latin America and the Caribbean Asia South-East Europe and the CIS (Transition economies)
6/24/2012
30
Conclusion
Markets and natural resources have been the key drivers of FDI from the emerging economies, but all others have remained important.
The standard government response to FDI from the emerging economies has been to regulate better those flows.
Given the growing significance of FDI from the emerging economies it will help if the home and host governments involved establish common and specific collaboration platforms to raise information flows as well as coordinate better the negotiations and execution of investment projects
6/24/2012

MNC and Foreign Direct Investment

Transféré par

Informations du document

Description originale:

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

MNC and Foreign Direct Investment

Transféré par

Droits d'auteur :

Formats disponibles

Multinational Corporations and Foreign Direct Investment

Sukumar Nandi Indian Institute of Management Lucknow

Issues _ Economic Integration

IMF definition of FDI 10 percent or more of share ownership as foreign.