Global Business- chapter 7

How Host Countries Promote FDI

1. Ownership restrictions- Government can impose ownership restrictions that prohibit non domestic companies from investing in certain industries or from owning certain types of businesses.

Management Issues with FDI- Customer Knowledge

A local presence can help companies gain valuable knowledge about customers that could not be obtained from the home market. Companies might look to produce a product in another country because of the country reputation, for example, a cologne or perfume producer might want to bottle its fragrances in France and give it a French name. This type of image appeal can be strong enough to encourage FDI

Eclectic theory- Location Advantage

A location advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics (natural or acquired) of that location (e.g. oil in the Middle East).

Reasons for Host Intervention- Control balance of payments (part 3)

Alternatively, host countries conserve their foreign exchange reserves when international companies reinvest their earnings. Reinvesting in local manufacturing facilities can also improve the competitions of local producers and boost a host nation exports- thus improving its balance-of-payments position.

Eclectic theory- Internalization Advantage

An internalization advantage is one that arises from internalizing a business activity rather than leaving it to a relatively inefficient market.

Eclectic theory- Ownership Advantage

An ownership advantage refers to company ownership of some special asset, such as brand recognition, technical knowledge, or management ability.

How Host Countries Promote FDI

Financial Incentives- Host government of all nations grant companies financial incentives to invest within their borders. One method includes tax incentives, such as lower tax rates or offers to waive taxes on local profits for a period of time- extending as far as five years or more. A country may slow offer low-interest loans to investors.

Management Issues with FDI- Following Clients

Firms commonly engage in FDI when the firm they supply have already invested abroad. The practice tends to result in companies clustering in close geographic proximity to each other because they supply each other inputs.

What are Flows of FDI

Foreign Direct Investment (FDI) flows record the value of cross-border transactions related to direct investment during a given period of time, usually a quarter or a year. Financial flows consist of equity transactions, reinvestment of earnings, and intercompany debt transactions.

FDI Vs Portfolio Income

Foreign direct investment (FDI) involves establishing a direct business interest in a foreign country, such as buying or establishing a manufacturing business, while foreign portfolio investment (FPI) refers to investing in financial assets such as stocks or bonds in a foreign country

Management Issues with FDI- Benefits of cooperation

Governments developing and emerging market realize the benefits of investment by multinational cooperation, including decreased unemployment, increased tax revenues, training to create a more highly skilled workforce, and the transfer of technology. Corporations also open up important communication channels that helps firms to maintain positive relationships in the host country.

Reasons for Host Intervention- Obtain resources and benefits (Part 1)

Governments might intervene in FDI flows to acquire resources and benefits such as technology, management skills, and employment. Access to technology- Investment in technology, whether in products or processes, tends to increase the productivity and the competitiveness of a nation

How Host Countries Promote FDI

Infrastructure Improvements- Lasting benefits for communities surrounding the investment location can result from making local infrastructure improvements- better seaports for containerized shipping, improved roads, and advanced telecommunications systems.

Reasons for Intervention by Home Countries

Investing in other nations sends resources out of the home country- As a result, fewer resources are used fro development and economic growth at home. On the other hand, profits earned on assets abroad that are returned home increase both a home country's balance of payments and its available resources.

Reasons for Intervention by Home Countries

Jobs resulting from outgoing investments may replace jobs at home- The relocation of production to a low-wage nation can have a strong impact on a locale or region. However, the impact is rarely national, and it effects are often muted by other job opportunities in the economy.

Management Issues with FDI- Production Cost

Labor regulations can add significantly to overall cost of production. Companies maybe required to provide benefit packages for their employees that are over and above hourly wages. More time maybe need to get the employee trained up to a certain standard. Even though most countries that multinational corporations move into have low taxes they can change over time, as seen in China economic growth. Rationalize production- a system of production in which each of a products component is produced where the cost of producing that component is lowest. All components are then brought together at one central location for assembly into the final product. Problems with this is that a work stoppage in one country can bring the entire production process to a standstill.

Reasons for Host Intervention- Obtain resources and benefits (Part 2)

Management Skills and Employment- Formerly communist countries lack some of the management skills needed to succeed in the global economy. By encouraging FDI, these nations can attract talented managers to come in and train locals and thereby improve the international competitiveness of heir domestic companies. The trained worker could start their own businesses.

Management Issues with FDI- Partnership Requirements

Many companies have strict policies regarding how much ownership they take in firms abroad because of the importance of maintaining control. But often countries demand shared ownership in return for market access. Governments see shared ownership requirements as a way to shield their workers from exploitation and their industries from domination by large international firms.

Reasons for Host Intervention- Control balance of payments (part 1)

Many governments see intervention as the only way to keep their balance of payments under control. First, because FDI inflows are recorded as additional to the balance of payments, a nation gets a balance-of-payments boost from an initial FDI inflow. Second, countries can impose local content requirements on inventors from other nations for the purpose of local production. Third, exports (if any) generated by the new production operation can have a favorable impact on the host country's balance of payments.

Reasons for Intervention by Home Countries

Outgoing FDI may ultimately damage a nation's balance of payments by taking the place of its exports- This can occur when a company creates a production facility in a market abroad, the output of which replaces exports that used to be sent there from the home country.

How Host Countries Promote FDI

Performance Demands- More common than ownership requirements are performance demands that influence how international companies operate in the host host nation. Although typically viewed as intrusive, most international companies allow for them in the same way they allow for home-country regulations.

Portfolio Income

Portfolio income is an investment that does not involve obtaining a degree of control in a company.

Management Issues with FDI- Purchase or build?

This is the decision on whether to purchase an existing business or to build a new one- called a greenfield investment. An acquisition generally provides the investor with an existing plant, equipment, brand recognition and personnel. Factors that reduce the appeal of purchasing an existing firm include obsolete equipment, poor relation with workers and an unsuitable location.

Eclectic Theory in FDI by Dunning

This theory states that firms undertake FDI when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment. The eclectic theory states that when a business have location, ownership, and internalization advantage they will undertake FDI.

Reasons for Host Intervention- Control balance of payments (part 2)

When companies repatriate profits back to their home countries, however, they deplete the foreign exchange reserves of their host countries. These capital outflows decrease the balance of payments of the host country. To shore up its balance of payments, the host nation may prohibit or restrict the nondomestic company from removing profits to its home country.

FDI- Foreign direct investment

is an investment in a business by an investor from another country for which the foreign investor has control over the company purchased.

Market Power

• Market power refers to the ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under competition is referred to as market or monopoly power. The exercise of market power leads to reduced output and loss of economic welfare.