Wendy JeffusHarvard Summer SchoolInternational Business

IntroductionAdministrationEthics Question (Submit Hard Copy to Brian)July 8th Project ProposalsFridays Section John Harvards 1:00-3:30pm Location: 33 Dunster Street, Cambridge, MA 02138 www.johnharvards.comChapter 6 SlidesWorlds Largest Companies Participation RankingForeign Direct Investment: DubaiCase Study: Starbucks Foreign Direct Investment Case Study: Cemexs Foreign Direct InvestmentChapter 7: Foreign Direct Investment

Participation Ranking (Section 2)4) Nethra Muralidharan, Elena Ponomareva

3) Andrew Buks, Bernadette Almeda, Sweta Joshi

2) Madhu Varshi

1) Ulrich Suter, Umut Ozeren, Ipek Hizlikan

Participation Ranking (Section 1)4) Marc Burde, Juliana Nascimento,

3) Benedikt Bingler, Ayhan Sebin

2) Laurent Blumberg, Frank Dike, Stuart Haigh

1) Laura Vega Silva, Andre Da Silva, Monica Garcia de la Cadena

Dubai Past & Present19912005

Dubai Burj al-Arab

Dubai Palm and the World

Dubai Burj Dubai

Dubai Dubailand Ski Dome

Foreign Direct Investment05/09 - The UAE expects to remain the main recipient of foreign direct investment in the Gulf Arab region.https://www.tradearabia.com/news/ECO_161892.html

Submitted by Andrew Buks & Kristin Johnson (Fall 2008)

Case AssignmentsStarbucks: FDI Cemexs: FDI

Present a 5-10min (timed) assessment of the case.All group members must participate.

Wendy JeffusHarvard Summer SchoolChapter 7: Foreign Direct Investment

What is the definition of FDI?Foreign Direct Investment is cross-border investment of greater than 10% (portfolio investment is less than 10% often in the form of stock and bonds).The flow of FDI refers to the amount of FDI undertaken over a given time periodThe stock of FDI refers to the total accumulated value of foreign owned assts at a given timeThe outflows of FDI refer to the flow of FDI out of a countryThe inflows of FDI refers to the flow of FDI into a country

Foreign Direct InvestmentfDi Intelligence recorded 15,551 greenfield FDI projects worth about $1500bn in 2008, creating an estimated 4 million direct jobs and 12 million indirect jobs worldwide

http://www.zawya.com/story.cfm/sidZAWYA20090423111545

Which Country?

Which Country?

FDI Outflow (1998-2003) Numbers are in $US billions (See Figure 7.4)

Global Companies

Where to Invest?Theory versus PracticeThe decision to invest abroad is often a stage in the firms development process.Eventually the firm experiences a stimulus from the external environment, which leads it to consider production abroad.Some important external stimuli are:An outside proposal, from a quality sourceFear of losing a marketThe bandwagon effectStrong competition from abroad in the home marketConnections familiarity with a market personal interest

The Eclectic ParadigmJohn Dunning (1988)The Eclectic Paradigm (or OLI Paradigm) is an attempt to create an overall framework to explain why MNEs choose FDI rather than serve foreign markets through alternative models such as licensing, joint ventures, strategic alliances, management contracts, and exporting.O owner-specific (competitive advantage in the home market that can be transferred abroad)L location-specific (specific characteristics of the foreign market allow the firm to exploit its competitive advantage)I internalization (maintenance of its competitive position by attempting to control the entire value chain in its industry)

Eclectic Paradigm (O-L-I)Microsoft transfers itstechnology from home, abroadFrance has government support for its wine industry.The Japanese auto industry transfers its perception of quality

Forms of FDIGreenfield operations:Usually only when an appropriate target is unavailable.Mergers and acquisitions:Quicker to executeAcquire valuable strategic assetsBelieve in the ability to increase the efficiency of the acquired firm.

A Key PointMergers are marriages between firms.They can be dysfunctional, unequal, unfair, and can result in expensive break-ups.To have a successful merger 1) chose your partner wisely 2) communicate goals 3) have a good lawyer.Photo source: For Bank of America and Merrill, Love Was Blind [1] http://www.bizjournals.com/baltimore/stories/2007/11/05/daily15.html[2] http://www.nytimes.com/2009/02/08/business/08split.html

Whos the BossBP/Amoco Merged in 1998A popular joke in Amoco hallways goes: Whats the British pronunciation of BP Amoco? BP the Amoco is silent.BP was a giant family of small businessesLondon, glass walls, peer groups, and hard targets.Amoco operated under a classic pyramid with heavy internal bureaucracy.Chicago, closed doors, aspirations, strategic planning counsels, and strict policiesThey even spelled organization and labor differently!

Market ImperfectionsMarket imperfections are factors that inhibit markets from working perfectlyRegulationsTariffsQuotasTransportation costsManagement experienceLower labor costsToyota (Japan)Decision to invest inthe US due in partto quotas on imports.In addition, believedlean productionwas hard to replicate.P&G (U.S.) moved some of its back-office accounting to the PhilippinesDell (U.S.) call centers in IndiaIBM & Microsoft (U.S.) have software development in India

Foreign Direct InvestmentHorizontal FDI - investment in the same industry Cemex (Mexicos largest cement manufacturer acquired RMC (cement firm in Britain)

Vertical FDI Backward Vertical upstream - investment in inputs (i.e. suppliers).Popular in oil, bauxite, & mining industriesForward Vertical downstream investment in outputs (i.e. customers)Volkswagen bought dealers in the US

LicensingLicensing is basically selling know-how (i.e. technology, brand, etc.)

Licensing vs. FDIChoose FDI whenNeed to protect know-howRCA licensed its color TV technology to Matsushita and Sony (oops).Want tight controlKodak wants its Japanese subsidiary to keep Fuji busy.Think others cant replicate your competitive advantage.Toyota thinks foreign companies dont get it.Photo source: Company websites

FranchisingFranchising is the service industrys version of licensing.McDonalds chooses franchising becauseFast-food cant be exportedEconomizes on costs and risks of foreign businessBrand is easier to protect (than technology, for example)Control can be communicated through contracts and company visits.

Decision Making Grid For FDI

Political IdeologyRadicalViewPragmaticNationalismFreeMarketMNEs are instrumentsof imperialist dominationFirst, No Country has adopted the Radical or Free Market views in their pure formsCubaVenezuelaIranFDI benefits both countriesCome on InU.S.U.K.

Pragmatic NationalismThe pragmatic nationalist view is that FDI has both benefits and costsAllow FDI if benefits outweigh costsBlock FDI that harms indigenous industryCourt FDI that is in national interestTax breaksSubsidies

Aberdeenshire, ScotlandAberdeenshire is a predominantly rural area in the north east of Scotland. Population: 236,300Salary: Average gross weekly earnings are 484.90. This is 18.80 lower than the Scottish average and 121.40 lower than in Aberdeen.Unemployment: 1.0%. This is lower than the average rates for Aberdeen City (1.6%), Scotland (2.8%) and the UK (2.6%).Traditionally, it has been economically dependent upon agriculture, fishing, forestry and related processing industries. Within the last 35 years, the emergence of the oil and gas industry and the development of the service sector have broadened Aberdeenshires economic base, leading to rapid population growth.https://www.cia.gov/library/publications/the-world-factbook/geos/uk.htmlLatest figures (2006) Source: http://www.aberdeenshire.gov.uk/statistics/area/aberdeenshire_profile2007.pdf

Aberdeenshire, ScotlandMenie Estate, close to the North Sea near Balmedie.Source: http://www.aberdeenshire.gov.uk/statistics/area/aberdeenshire_profile2007.pdf; http://www.meniehouse.com/find.asp; http://news.bbc.co.uk/1/hi/scotland/4862982.stmX

Donald TrumpI have never seen such an unspoilt and dramatic sea side landscape and the location makes it perfect for our development. Donald TrumpMarch 2006 - The US billionaire announced plans to build a new world class golfing centre in Aberdeenshire. The centre will include two championship courses, a hotel and a holiday home complex. Mr Trump, speaking on his website, said: "I have been actively looking for links land in Europe for the past few years. "Of course my preference was Scotland over any other country because I am half Scottish - my mother, Mary MacLeod, is from Stornoway. "When I saw this piece of land I was overwhelmed by the imposing dunes and rugged Aberdeenshire coastline. I knew that this was the perfect site for Trump International, Scotland. http://news.bbc.co.uk/1/hi/scotland/4862982.stm

Trump in ScotlandJune 10, 2008 Donald Trump visited his mother's childhood home yesterday on the Scottish Isle of Lewis, a pilgrimage that lasted as little as 97 seconds or as much as two minutes, according to the Guardian and the Glasgow Herald, respectively.****http://news.bbc.co.uk/1/hi/scotland/4862982.stm**http://news.scotsman.com/uk/Golf-plans-threaten-change-of.4200208.jp***http://www.portfolio.com/views/blogs/daily-brief/2008/06/10/the-donald-gets-a-scottish-cheerPhoto source: http://www.nydailynews.com/news/us_world/2008/06/10/2008-06-10_donald_trump_vows_love_for_scotland_as_h-1.html

FDI in ScotlandBenefits to the host countryEconomic DevelopmentThe development could bring 150m to the local economy over the next decade, creating 400 jobs. First Minister Jack McConnell*"This is an unbelievable tourism opportunity for the region and, with Royal Deeside and castle and whisky trails on the doorstep, the overall visitor package will be tremendous. Ian Dunlop, area director for Visit Scotland*

Costs to the host countryEnvironmental Concernswill effectively destroy the "jewel in the crown" of Britain's shifting sand dune systemsthe main championship course at Menie would involve "biblical amounts" of sand being moved at a protected site of "national" environmental importance.Dr Jim Hansom, expert on coastal research**Note: Trump rejected an alternative golf course design that environmental groups claimed would allow him to go ahead with his project without destroying the protected dune system at the Menie Estate.****Heritage"We are approaching it in a co-operative manner, it has huge potential for the area and we recognise that, but we must protect the heritage.Scottish National Heritage (SNH) Grampian area manager Ron MacDonald*

*http://news.bbc.co.uk/1/hi/scotland/4862982.stm**http://news.scotsman.com/uk/Golf-plans-threaten-change-of.4200208.jp****http://www.cogolf.ca/news.php?readmore=242Sand dunes in the area are designated to be of Special Scientific Interest (SSSI)

OppositionMichael Forbes owns 23 acres on the Scottish cast that Donald Trump wants and hes offered $790K for the property. Forbes said no. Forbes noted, [Trump] seems to think everything is for sale." A British businessman offered to pay more than $1.5 million for the land just to stand in Trump's way. http://www.washingtonpost.com/wp-dyn/content/article/2007/12/06/AR2007120602387.html***http://www.portfolio.com/views/blogs/daily-brief/2008/06/10/the-donald-gets-a-scottish-cheerLocals armed with signs that read "We Don't Want You Hair" and "Don't Comb Over Here," questioned why it took so long for Trump to finally visit his mum's childhood home.***

SupportMagnus Linklater is backing Donald Trump. Hes backing his big ideas, his big ego, his big private jet, and his big hairstyle Linklater wants Trump to win the argument for his 1 billion golf course, along with the 1,000 houses he is planning, and the five-star hotel, to be called, [he has] no doubt, Castle Trump. Linklater says I like the size, the scale, the sheer unadorned vulgarity of it all.Opposition falls into two categories: innate suspicion of wealth and deep-dyed hostility to anything that threatens the environment. Three acronyms strike terror into the heart of any developer Scottish National Heritage (SNH), Royal Society for the Protection of Birds (RSPB) and Site of Special Scientific Interests (SSSI). I like thinking big, Mr. Trump says. If you're going to be thinking anything, you might as well think big. Love him or loathe him, you cannot fault him on consistency.- Magnus Linklater The three miles that Mr. Trump would like to commandeer constitute but a tiny and deserted percentage of the total (sand dunes). Since he took an interest, however, (they are) no longer just sands, they are described as unspoilt dune ecosystems, or mobile dune vegetation, the crown jewels of our most precious habitathttp://www.timesonline.co.uk/tol/comment/columnists/magnus_linklater/article4106593.ece; http://www.timesonline.co.uk/tol/comment/columnists/magnus_linklater/

Bargaining Chips: County Antrium & the Lewis CastleDecember 2007 - When local government officials rejected the project last week, Trump threatened to walk away -- perhaps to go over to Northern Ireland (County Antrim), where government ministers said they would welcome his big-bucks development.+ As Trump was meeting in New York this week with the Rev. Ian Paisley, head of the government of Northern Ireland, the Scottish government took control of Trump's application.+ County Antrim Scottish leader Alex Salmond, whose constituency includes the proposed development, issued a statement saying Trump's plan "raises issues of importance" that require consideration at his level.+ It looks like Trump is already working on his next book title - How To Get Away With Building Whatever You Like. Step one: pick a small, impressionable country for your development, one with a slight inferiority complex that's keen to strut its stuff on the world stage. Step two: play it off against another small, impressionable country with a slight inferiority complex that's keen to strut its stuff on the world stage. Step three: threaten it with the stick of losing potential revenue and world renown for a glittering top-drawer development. Step four: dangle lots of carrots, or sweeteners, that cast you in a suitably philanthropic light. Step five: sit back and let local worthies fight your corner for you.Joanna Blythman on Doanald Trump+++http://www.washingtonpost.com/wp-dyn/content/article/2007/12/06/AR2007120602387.html++http://www.sundayherald.com/oped/opinion/display.var.2326505.0.pulling_the_tartan_down_over_our_eyes.phpPhoto Source: http://upload.wikimedia.org/wikipedia/commons/thumb/b/bb/Scotland_Lewis_Stornoway_castle.jpg/800px-Scotland_Lewis_Stornoway_castle.jpg

Nicklaus in ScotlandJune 20 A MASSIVE project that will put the North-east on the world golfing map was given the green light yesterday by Aberdeenshire Council's infrastructure services committee.But, sadly for Donald Trump, it wasn't his development. Rather, it was a 40 million residential and leisure development that will have as its centrepiece a flagship course designed by Jack Nicklaus. Including the restoration of Ury House, the B-listed derelict Elizabethan-style mansion at the centre of the estate.While controversy has raged over Mr Trump's insistence that his main championship course should be sited in a protected site of scientific interest, the Nicklaus course development at the Ury estate on the outskirts of Stonehaven has gone quietly through the various stages of the planning process.The go-ahead was also welcomed by prominent business leaders in the North-east. Jennifer Craw, the regional operations director for Scottish Enterprise, said "Internationally renowned backers like Jack Nicklaus, with their household names and reputations, have the kudos to draw visitors from all over the world to our region."Richard Milne, the director of FM Developments, said: "Our redevelopment of Ury Estate also represents enabling development in its purest form, with the proceeds from housing directly funding the renovation of historic Ury House.... Our vision for Ury Estate will benefit not only the Stonehaven community, but the region's economy to the tune of tens of millions of pounds."Geoff Runcie, the chief executive of Aberdeen and Grampian Chamber of Commerce, said: "Along with the related renovation of Ury House and the addition of new rural housing, this development will bring a new tourism and leisure dimension to the Stonehaven area."http://news.scotsman.com/scotland/Goahead-for-massive-golf-resort.4205726.jp; Photo Ury House wikipedia.orgX

Plane Stupid03/14/09 A group that calls themselves Plane Stupid protested the expansion of the Aberdeen airport, blaming Trumps Proposed Golf Resort.http://edition.cnn.com/2009/WORLD/europe/03/03/uk.aberdeen.airport.protest/

Trump scoops Stupid Award for golf course plan 03/26/09 Donald Trump won the much-coveted Ostrich Award for "steamrolling Scottish democracy in order to open the door to developments that encourage flying".Scottish Stupid Awards 2009 for trashing the planet http://www.sundayherald.com/news/heraldnews/display.var.2497073.0.trump_scoops_stupid_award_for_golf_course_plan.php

05/26/09Donald Trump, who, three years ago acquired an 800-acre seaside site, not far from Royal Aberdeen. Mr. Trump "modestly" promises to build a pair of the best links courses in Scotland, boasting they will be hosting both The British Open and The Ryder Cup someday! Probably not Mr. Trump, Scotland has a few other courses that have been standing in line for a century or so for the honor, Royal Aberdeen among them.Of course Mr. Trump also wants to build a 450-room luxury hotel with all the usual Florida-like trimmings, including 250 private homes and heaven knows what else, but don't be frightened away. The Donald has recently postponed his plans until world economies improve, so you still have a few years to experience the unspoiled Aberdeen coast, patiently waiting to show-off its historic, golfing treasures.http://www.pgatour.com/2009/tourlife/travel/05/23/course_of_week/

Enter: Sarah Malone http://www.eveningexpress.co.uk/Article.aspx/1284313?UserKey=

Sarah Malone07/07/09 Sarah Malone to Trump tycoon's opponentsA formidable woman is poised to drive forward Donald Trumps golfing plans for Balmedie in the face of local angerhttp://www.timesonline.co.uk/tol/news/uk/scotland/article6445223.eceThe principal anti-Trump lobby, Sustainable Aberdeenshire, has been augmented by a new group, Tripping Up Trump, funded by a well-known millionaire backer. Though its now an incontestable reality, the development, on the dunes of Menie, looks likely to find stones in its spiked shoes for some time to come.

Sarah MaloneWhich is where Malone comes in. It was plainly unsustainable that an American corporation could run its bulldozers over a beauty spot without at least offering some kind of sop to indigenous feeling; the echoes of Local Hero would just be too insistent. So Malone was headhunted eighteen months ago. Her background was researched by news reports before she was flown to New York for some face-time with Trump himself who was impressed by her record, and - one has to speculate - her looks. Her appointment was finally unveiled last week by Trumps eldest son, Donald Jnr, who said she would help the global monolith understand the needs and wants of local people. http://www.timesonline.co.uk/tol/news/uk/scotland/article6445223.ece

Foreign Direct Investment (Host)Benefits to Host CountrySupply of capital and other resourcesTechnologyManagementEmployment BOP (Balance of Payments)Capital inflow, import substitution & subsequent exportsCompetitionIncrease in consumer choice, lowers pricesCosts to Host Country Loss of national sovereigntyForeign parent has no commitment to host countryFear of monopoly powerBOPImport of inputs from abroadOutflow of foreign subsidiary's earnings

Foreign Direct Investment (Home)Benefits to Home CountryBOPInflow of foreign earningsEmployment effectsForeign subsidiaries create demand for home-country exportsReverse-resource transfer effectForeign subsidiary learns skills abroad and transfers knowledge homeCosts to Home Country BOPInitial capital outflowExport substitutionExport of jobs abroad

Policies and FDI (Home)Encourage Outward FDIGovernment backed insurance programsCapital assistanceTax incentivesPolitical pressureExample: Japan responded to political pressure from the U.S. in the 80s and relaxed informal barriers

Discourage Outward FDILimit capital outflowsTax incentives to invest at homeExample: Britain once taxed foreign earnings higher than domestic earnings.Prohibit national firms from investing in certain countriesU.S. discourages investment in Cuba & Iranhttp://www2.toysrus.co.jp/truj/english/index.html

Policies and FDI (Host) Encourage Inward FDITax concessionsLow interest loansGrants/subsidies

Discourage Inward FDIOwnership restraintsProhibited operating in certain fieldsRequire that a significant proportion of the equity be owned by local investorsPerformance RestraintsLocal ContentHiringExports

The Negotiation ProcessThe negotiation process has been characterized as occurring within the context of the four Cs Common interests Conflicting interests CompromiseCriteria

Negotiation & Bargaining PowerThe outcome of any negotiated agreement depends on the relative bargaining power of both partiesBargaining power depends on three factorsThe value each side places on what the other has to offerThe number of comparable alternatives available to each sideEach partys time horizon

Resource for your Final Projecthttp://www.fdi.net/country/

Stuff to this weekendOptional Review Session on FridayNext week is July 4th http://www.faneuilhallmarketplace.com/http://www.marinabaybeachclub.com/http://www.cityofboston.gov/FreedomTrail/bostoncommon.asp

*Dubai Sports City 7.5 sq km sporting complexHydropolis Underwater HotelDubailand 185 sq km theme park cos tof US$64 billion

*Since World War II, the United States has been the largest source country for FDI, a position it retained during the late 1990s and early 2000s (see Figure 7.4). Other important source countries include the United Kingdom, France, Germany, the Netherlands, and Japan. Collectively, these six countries accounted for 60 percent of all FDI outflows for 19982003 and 63 percent of the total global stock of FDI in 2003. As might be expected, these countries also predominate in rankings of the worlds largest multinationals.

Figure 7.4, p. 244

Figure 7.6, p. 256Radical: Cambodia, CubaFree market: Sweden, Mexico, South KoreaPragmatic: Iran, Venezuela, China

Radical view Strictly against FDIMultinational Enterprises (MNE) are an imperialist tool for exploiting host countriesFree market view MNE is an instrument for increasing overall efficiency of resource utilization in the world economyPragmatic nationalism FDI has both benefits and costs

RSPB Scotland and the Scottish Wildlife Trust (SWT) commissioned Mike Wood, a respected golf course architect, to come up with a new plan for the Aberdeenshire resort.****More than 12,000 people have signed a petition on the Web site of 10 Downing Street, the British prime minister's office, supporting Trump. The opposing side has received 5,000 online petition signatures and 1,000 handwritten letters of oppositionTrump has conveniently agreed to "discuss" the restoration of Lewis Castle, near Stornoway, a baronial pile built in 1847 that Western Isles Council wants to revamp as a hotel and museum. The inference to be drawn is that Trump just might - though no guarantee is given - consider digging into his deep pockets to help the restoration effort.++ Common interests are the goals that the MNE and the country have in common.Conflicting interests arise from such issues as the proportion of component parts that will be procured locally rather than imported, the total amount of investment, the total number of jobs created, and the proportion of output that will be exported. Compromise involves reaching a decision that brings benefits to both parties, even though neither will get all of what it wants. MNEs criteria or objectives are to achieve satisfactory profits and to maintain 100 percent ownership. The countrys criteria are to achieve satisfactory net benefits from the resource-transfer, employment, and balance-of-payments effects of the investment.

Figure 8.1, p. 283