Foreign Direct Investment.docx

Foreign Direct Investment.docx

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ForeignDirectInvestment

ForeignDirectInvestment

ChapterOutline

OpeningCase:

LakshmiMittalandtheGrowthofMittalSteel

INTRODUCTION

FOREIGNDIRECTINVESTMENTINTHEWORLDECONOMY

TrendsinFDI

TheDirectionofFDI

CountryFocus:

ForeignDirectInvestmentinChina

TheSourceofFDI

TheFormofFDI:

AcquisitionsversusGreenfieldInvestments

TheShifttoServices

THEORIESOFFOREIGNDIRECTINVESTMENT

WhyForeignDirectInvestment

ManagementFocus:

ForeignDirectInvestmentbyCemex

ThePatternofForeignDirectInvestment

TheEclecticParadigm

POLITICALIDEOLOGYANDFOREIGNDIRECTINVESTMENT

TheRadicalView

TheFreeMarketView

PragmaticNationalism

ShiftingIdeology

ManagementFocus:

DPWorldandtheUnitedStates

BENEFITSANDCOSTSOFFDI

HostCountryBenefits

HostCountryCosts

HomeCountryBenefits

HomeCountryCosts

InternationalTradeTheoryandFDI

GOVERNMENTPOLICYINSTRUMENTSANDFDI

HomeCountryPolicies

HostCountryPolicies

InternationalInstitutionsandtheLiberalizationofFDI

FOCUSONMANAGERIALIMPLICATIONS

TheTheoryofFDI

GovernmentPolicy

SUMMARY

CRITICALTHINKINGANDDISCUSSIONQUESTIONS

CLOSINGCASE:

Starbuck’sForeignDirectInvestment

LearningObjectives

1.BefamiliarwithcurrenttrendsregardingFDIintheworldeconomy.

2.Understandthedifferenttheoriesofforeigndirectinvestment.

3.Appreciatehowpoliticalideologyshapesagovernment’sattitudestowardsFDI.

4.UnderstandthebenefitsandcostsofFDItohomeandhostcountries.

5.BeabletodiscusstherangeofpolicyinstrumentsthatgovernmentsusetoinfluenceFDI.

6.ArticulatetheimplicationsformanagementpracticeofthetheoryandgovernmentpoliciesassociatedwithFDI.

ChapterSummary

Thischapterfocusesonthetopicofforeigndirectinvestment（FDI）.FDIoccurswhenafirminvestsdirectlyinnewfacilitiestoproduceand/ormarketaproductinaforeigncountry.Attheoutset,thechapterdiscussesthegrowthinFDI,particularlybymedium-sizedandsmallfirms.ThetheoreticalunderpinningsofFDIarediscussed,whichdescribeunderwhatcircumstancesitisadvantageousforafirmtoinvestinproductionfacilitiesinaforeigncountry.Thechapteralsoaddressesthedifferentpoliciesthatgovernmentshavetowardforeigndirectinvestment.SomegovernmentsareopposedtoFDIandsomegovernmentsencourageit.ThreespecificideologiesofFDIarediscussed,includingtheradicalview,thefreemarketview,andpragmaticnationalism.ThechapteralsoprovidesadiscussionofthecostsandbenefitsofFDIfromtheperspectiveofboththehomecountryandthehostcountryinvolved.ThechapterconcludeswithareviewofthepolicyinstrumentsthatgovernmentsusetoregulateFDIactivitybyinternationalfirms.

OpeningCase:

LakshmiMittalandtheGrowthofMittalSteel

Summary

TheopeningcaseexploresthegrowthofMittalSteel.MittalSteelbeganasafamily-runcompanyinIndia1975.By2007,MittalSteelwasthelargeststeelcompanyintheworldwithsalesof$110billion,andanetincomeof$10.2billion.MittalSteel’sgrowthstrategyinvolvedacquiringdistressedcompaniesonthecheap,modernizingthem,andtakingadvantageofananticipatedboominglobalsteeldemand.Thefollowingquestionscanbeusedtogeneratediscussionofthecase:

SuggestedDiscussionQuestions

QUESTION1:

HowdidMittalSteelgrowfromalmostnothingtobetheworld’slargeststeelcompanyinsuchashorttime?

Howimportantwerethecompany’sforeignacquisitionstoitssuccess?

ANSWER1:

MittalSteelbeganasasmallfamily-runfirminIndiain1975.ThecompanyacquiredaTrinidadianplantin1989afterhelping,undercontract,toturnthefirmaround.MittalSteelcontinuedmakingacquisitionsthroughoutthenextdecade,focusingprimarilyoncompaniesthatwereindistressthatcouldbeacquiredcheaply,modernized,andmademoreefficient.MoststudentswillprobablyagreethatMittalSteel’sstrategywasessentialtoitssuccessbecauseithelpedtopositionthecompanywellwhenglobaldemandforsteelexplodedinthe2000s.

QUESTION2:

WhywasMittalSteel’sacquisitionofArcelorsocontroversial?

Doyouagreewiththosewhoopposedtheacquisition?

Whyorwhynot?

ANSWER2:

ArcelorwasaEuropeanfirmthatwasformedasaresultofamergerbetweensteelmakersfromLuxembourg,France,andSpain.MittalSteelbeganitshostiletakeoverofArcelorin2006.Arcelor’smanagementstronglyresistedthetakeoverattempt,asdidanumberofEuropeanpoliticianswhofeltthatitwaswrongforanIndiancompanytoacquiretheEuropeanfirm.ManystudentswillagreewiththeEuropeanpoliticiansandmanagementofArcelorsuggestingthattheacquisitionmadeMittalSteeltheworld’slargeststeelcompany,andtherefore,gavethecompanyacertainamountofmonopolypower.SomestudentsmayalsosuggestthattheacquisitionleftEuropewithoutasignificantplayerintheindustry.OtherstudentshoweverwillsidewithMittalSteelandpointoutthatthedealwasappealingtoArcelor’sshareholders,whoultimatelyapprovedthedeal.

TeachingTip:

FormoreinformationonMittalSteelgoto{

ChapterOutlinewithLectureNotes,VideoNotes,andTeachingTips

INTRODUCTION

A）Thischapterisconcernedwiththephenomenonofforeigndirectinvestment（FDI）.Foreigndirectinvestmentoccurswhenafirminvestsdirectlyinnewfacilitiestoproduceand/ormarketinaforeigncountry.OnceafirmundertakesFDIitbecomesamultinationalenterprise.

TeachingTip:

Fortunemagazinepublishesalistofthe500largestglobalcorporationsintheworld.Formoreinformation,goto{Thearticlealsobreaksdownthelistbycountry,andisanexcellentresourcefordiscussingtheroleoflargemultinationalsintheworldeconomy.

B）FDItakesontwomainforms;thefirstisagreenfieldinvestment,whichinvolvestheestablishmentofawhollynewoperationinaforeigncountry.Thesecondinvolvesacquiringormergingwithanexistingfirmintheforeigncountry.Therearethreetypesofacquisitions:

minority（10percentto49percentstake）,majority50percentto99percent）,orfull（100percent）.

FOREIGNDIRECTINVESTMENTINTHEWORLDECONOMY

A）Whendiscussingforeigndirectinvestment,itisimportanttodistinguishbetweentheflowandthestockofforeigndirectinvestment.TheflowofFDIreferstotheamountofFDIundertakenoveragiventimeperiod（normallyayear）.ThestockofFDIreferstothetotalaccumulatedvalueofforeign-ownedassetsatagiventime.OutflowsofFDI,meaningtheflowofFDIoutofacountry,andinflowsofFDI,meaningtheflowofFDIintoacountryarealsodiscussed.

TrendsinFDI

B）Overthepast30yearstherehasbeenamarkedincreaseinboththeflowandstockofFDIintheworldeconomy.ThesignificantgrowthinFDIhasbothtodowiththepoliticaleconomyoftradeasoutlinedinthepreviouschapterandthepoliticalandeconomicchangesthathavebeentakingplaceindevelopingcountries.

C）FDIhasgrownmorerapidlythanworldtradeandworldoutputforthreereasons.First,firmsstillfearthethreatofprotectionism.Second,thegeneralshifttowarddemocraticpoliticalinstitutionsandfreemarketeconomieshasencouragedFDI.Third,theglobalizationoftheworldeconomyishavingapositiveimpactonthevolumeofFDIasfirmsundertakeFDItoensuretheyhaveasignificantpresenceinmanyregionsoftheworld.

TheDirectionofFDI

D）Historically,mostFDIhasbeendirectedatthedevelopednationsoftheworld,withtheUnitedStatesbeingafavoritetarget.FDIinflowshaveremainedhighduringtheearly2000sfortheUnitedStates,with$192billionin2007,andalsofortheEuropeanUnion.InwardinvestmentintotheEuropeanUnionwas$610billionin2007.

E）South,East,andSoutheastAsia,andparticularlyChina,arenowseeinganincreaseofFDIinflows.Chinaattractednearly$70billioninFDIfrom2005to2007.LatinAmericaisalsoemergingasanimportantregionforFDI.Inwardinvestmenttotheregionwasabout$126billionin2007.

F）Grossfixedcapitalformationsummarizesthetotalamountofcapitalinvestedinfactories,stores,officebuildings,andthelike.Allelsebeingequal,thegreaterthecapitalinvestmentinaneconomy,themorefavorableitsfutureprospectsarelikelytobe.Thus,FDIcanbeseenasanimportantsourceofcapitalinvestmentandadeterminantofthefuturegrowthrateofaneconomy.

TeachingTip:

TheUnitedNationsConferenceonTradeandDevelopment（UNCTAD）providesextensivestatisticsontheflowsofforeigndirectinvestmentandtheoperationsoftransnationalcompanies.Formoreinformation,goto{http:

//www.unctad.org/Templates/Page.asp?

intItemID=1923&lang=1}.

CountryFocus:

ForeignDirectInvestmentinChina

Summary

ThisfeatureexploresinvestmentopportunitiesinChina.Inthelate1970s,Chinaopeneditsdoorstoforeigninvestors.Bythemid2000s,Chinaattracted$65-70billionofFDIannually.China’slargepopulationisamagnetformanycompaniesandbecausehightariffsmakeitdifficulttoexporttotheChinesemarket,firmsfrequentlyturntoforeigndirectinvestment.However,manycompanieshavefounditdifficulttoconductbusinessinChina,andinrecentyearsinvestmentrateshaveslowed.Inresponse,theChinesegovernment,hopingtocontinuetoattractforeigncompanieshasestablishedanumberofincentivesforwould-beinvestors.Thefollowingquestionscanbeusedinadiscussion.

1.ConsiderthechallengesinvolvedwithinvestinginChina.HowdoesChina’spoliticalpositionandeconomicsituationaffectitsabilitytoattractforeigndirectinvestment