FOREIGN DIRECT INVESTMENT

(FDI)

Worldwide flows of FDIThe Theory of FDI

MNC-Government Relations & Government Policy

Foreign market entry modes

Foreign Direct Investment by MNCs

is either factor seeking or market seeking

Developed country to Developed countryFactors (Technology & Skilled manpower)Market (Competitiveness)

Developed country to Developing countryFactors (Labor, Raw Material)Market (take advantage of Sellers’ market)

Developing country to Developing countryFactors (Labor, Raw Material)Market (take advantage of Sellers’ market)

Developing country to Developed countryFactors (Technology, Capital)Market (Specialized Products)

DIRECTION OF FOREIGN DIRECT INVESTMENT

($ MILL) RANK US$ RANKASIA SINGAPORE 42,145 11 14,048 1EUROPE BELGIUM & LUX. 72,775 6 7,278 2EUROPE NETHERLANDS 69,783 7 4,652 3EUROPE SWEDEN 37,950 12 4,217 4EUROPE SWITZERLAND 25,983 16 3,712 5OECD AUSTRALIA 62,932 9 3,496 6EUROPE UK 199,312 2 3,436 7EUROPE DENMARK 15,719 18 3,144 8EUROPE FRANCE 140,372 3 2,463 9EUROPE SPAIN 92,716 5 2,377 10OECD CANADA 65,642 8 2,264 11OECD USA 502,270 1 1,947 12ASIA MALAYSIA 31,456 14 1,656 13EUROPE PORTUGAL 14,923 21 1,492 14EUROPE FINLAND 6,116 29 1,223 15E.EUROPE HUNGARY 9,935 23 994 16EUROPE GREECE 9,876 24 988 17EUROPE AUSTRIA 6,931 28 866 18EUROPE ITALY 37,572 13 659 19ASIA TAIWAN 11,388 22 542 20L.AMERICA MEXICO 45,651 10 507 21EUROPE GERMANY 26,408 15 326 22EUROPE IRELAND 1,077 30 269 23ASIA THAILAND 15,296 20 264 24ASIA S. KOREA 9,144 25 208 25E.EUROPE POLAND 7,254 27 191 26L.AMERICA BRAZIL 21,872 17 140 27ASIA CHINA 131,503 4 112 28ASIA INDONESIA 15,401 19 82 29OECD JAPAN 8,640 26 70 30

TOTAL INFLOW PER CAP. INFLOW

FDI INFLOWS 1986-97 - countries ranked by per capita inflow

MAJOR INVESTORS (%)

0

10

20

30

40

50

60

1967 1976 1994 1997

USAJapanother DCsLDCs

TABLE 1

Major Investors (notes to Table 1)

Total FDI: (annual flow in US$ billions)

1975: 25

1998: 644

LDC Investor countries: (%)1976-80 1976-90 1994

Total LDC percent 1.8 3.0 17

Asia-Pacific LDCs 0.3 2.1 15

other LDCs 1.5 0.9 2

MAJOR RECIPIENTS (%)

0

10

20

30

40

50

60

1976-80 1976-90 1994 1997

USAJapanother DCAP LDCother LDC

TABLE 2

MAJOR RECIPIENTS (%)

0

10

20

30

40

50

60

70

80

90

1981-5 1986-90 1991 1992 1997

DCsLDCs

Top 10 LDCsLLDCs

TABLE 3

(na)

Stock of FDI in top 12 LDCs (US$ bil.)1980 1995

China 2* 129 (* 1985)Mexico 9 60Singapore 7 53Indonesia 10 49Brazil 17 47Malaysia 6 38Argentina 5 25Hong Kong 2 22Greece 4 20Thailand 1 19Taiwan 3 17South Korea 1 16

RESPONSE TO TRADE PROTECTION•overcome tariff & non‑tariff restrictions - eg. EU, NAFTA

FOLLOWING COMPETITORS•primarily in oligopolistic industries•prevent competition from getting an edge

MARKET CONTROL•getting/maintaining access to strategic input markets•getting/maintaining access to output markets

GEOGRAPHIC DIVERSIFICATION•Maximizing synergy between different market locations•Spreading risk over different markets

COMMON MOTIVES FOR FDI

(all of which can be addressed by the “eclectic paradigm”)

THE THEORY OF FOREIGN DIRECT INVESTMENT (FDI) – John Dunning

Dunning’s “eclectic model”~ three eclectic aspects:

1. Ownership advantages2. Location advantages3. Internalization advantages the “OLI

paradigm”

Dunning developed his conceptual framework on the basis of “advantages that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets.” (CWL Hill)

OLI – Eclectic Model by John DunningOLI – Eclectic Model by John Dunning

OWNERSHIP Advantages: Firm Specific Factors(in some cases, but not all, these are oligopolistic advantages)

experience curve economiesscale economiesintegrated global management systemsproduct differentiationasset specificity and resource embeddedness(We later use the term, core competencies.)

LOCATION Advantages: Country Specific Factorsleast cost production siteglobal webnational incentives for investments or against imports

OLI – Eclectic Model by John Dunning OLI – Eclectic Model by John Dunning (contd.)(contd.)

INTERNALIZATION Advantages:(Impediments To Licensing )

Risk giving away know-

how to competitors

Licensing implies low control over

foreign entityKnow-how not amenable to

licensing

Impediments to the sale of know

how

FDI - Political Economy

Radical View - MNCs are neo-imperialist ventures that extract value without adequate compensation.

Market View - MNCs facilitate the efficient global allocation of resources.

MULTINATIONALS~ EVERYBODY’S FAVORITE MONSTER

Back in fashion

early controversy; today a change of view

Creatures of imperfection

Theory of FDI: imperfect competitionFDICountry impediments/incentives

Firm-specific advantage may require Internalization

Examples: (Have imperfection, will travel)

continued: MULTINATIONALS~ EVERYBODY’S FAVORITE MONSTER

The non-global firm

Multinationalization: extension of home base

Holding hands

The variety of reasons for alliances –is it a fad?

A global game of monopoly?

Great theoretical issue: Is global industry becoming more concentrated (oligopolistic), or more free?

On present trends

(trends in where FDI is going, and government policy)

POLITICAL & FINANCIAL STABILITY

SOPHISTICATED INFRASTRUCTURE

REDUCE TRANSACTIONS COSTS IN INPUT MARKETS

PROACTIVE STRATEGY BY SINGAPORE GOVERNMENT TO ATTRACT FDI

REDUCE TRANSACTIONS COSTS IN INPUT MARKETS -1

CAPITALNo restrictions on inflows and outflows

LAND & PLANT SET-UPSophisticated infrastructure and constructionMinimize set-up time with one-stop shopping

CHEAP LABORImport if necessaryUtilize provisions under SIJORI* agreement

*Singapore – Johore (Malaysia) – Riau Islands (Indonesia)

REDUCE TRANSACTIONS COSTS IN INPUT MARKETS -2

HIGH-SKILL LABOREducated domestic workforceNo restrictions on hiring of expatriatesNo local hiring requirements

TECHNOLOGYProtection of intellectual property rightsHigh-tech infrastructure

MARKET INTEGRATIONSIJORI, ASEAN, AFTA, APEC, bilateral agreements

Entry Modes

Exporting

Turnkey Projects

Licensing

Franchising

Joint Ventures

Wholly Owned Subsidiaries

Advantages and Disadvantages of Entry Modes

Entry Mode Advantage Disadvantage

Exporting Ability to realize location andexperience curve economies

High transport costs Trade barriers Problems with local marketing agents

Turnkey contracts

Ability to earn returns from process technology skills incountries where FDI isrestricted

Creating efficient competitors Lack of long-term market presence

LicensingLow development costs and risks

Lack of control over technologyInability to realize location & experience curve economiesInability to engage in global strategic coordination

Advantages and Disadvantages of Entry Modes

Entry Mode Advantage Disadvantage

Franchising Low development costsand risks

Lack of control over quality Inability to engage in global strategic coordination

ventures

Access to local partner’sknowledge

Sharing developmentCosts and risks

Politically acceptable

Lack of control over technologyInability to engage in global strategic coordinationInability to realize location and experience economies

Wholly owned

subsidiaries

Protection of technologyAbility to engage in global strategic coordinationAbility to realize location & experience economies

High costs and risks

Joint

Selecting an Entry Mode

Technological Know-How

Management Know-How

Wholly owned subsidiary, except:

1. Venture is structured to reduce risk of loss of technology.

2. Technology advantage is transitory.

Then licensing or joint venture OK.

Franchising, subsidiaries (wholly owned or joint venture).

Pressure for Cost Reduction

Combination of exporting and wholly owned subsidiary.