Chapter 07 - Foreign Direct Investment
Chapter 07 - Foreign Direct Investment
Chapter 07 - Foreign Direct Investment
Globalization
Ninth Edition, Global Edition
Chapter 7
Foreign Direct Investment
• From its 48 production facilities worldwide, the company produces and sells around 8
million cars annually to more than 150 countries.
• Volkswagen also has ambitious goals for its U.S. expansion. It is adapting designs to
domestic tastes, cutting prices, and adding inexpensive production capacity.
• The company uses a modular strategy in production that lets it use the same key
components in 16 different vehicles and 7 million units across its brands.
Source: Based on World Investment Report (Geneva, Switzerland: UNCTAD), various years.
Source: Based on World Investment Report (Geneva, Switzerland: UNCTAD), various years.
• In the new product stage, a good is produced in the home country because of uncertain
domestic demand and to keep production close to the research department that
developed the product.
• In the maturing product stage, the company directly invests in production facilities in
countries where demand is great enough to warrant its own production facilities.
• Despite its conceptual appeal, the international product life cycle theory is limited in its
power to explain why companies choose FDI over other forms of market entry.
• There are two market imperfections that are relevant to this discussion—trade barriers
and specialized knowledge.
• The benefit of market power is greater profit because the firm is far better able to dictate
the cost of its inputs and/or the price of its output.
• One way a company can achieve market power (or dominance) is through vertical
integration—the extension of company activities into stages of production that provide a
firm’s inputs (backward integration) or that absorb its output (forward integration).
• Purchase-or-Build Decision
– Greenfield investment
• Production Costs
– Rationalized production
– Mexico’s Maquiladora
– Cost of research and development
• Customer Knowledge
• Following Clients
• Following Rivals
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Management Issues and Foreign Direct
Investment
• Control: Many companies investing abroad are greatly concerned with
controlling the activities that occur in the local market. Many companies
have strict policies regarding how much ownership they take in firms
abroad because of the importance of maintaining control.
Governments of developing and emerging markets realize the benefits
of investment by multinational corporations, including decreased
unemployment, increased tax revenues, training to create a more
highly skilled workforce, and the transfer of technology
• Purchase-or-Build Decision: Another important matter for managers
is whether to purchase an existing business or to build a subsidiary
abroad from the ground up—called a greenfield investment.
• The current account records transactions involving the import and export of goods and
services, income receipts on assets abroad, and income payments on foreign assets
inside the country.
• The capital account records transactions involving the purchase or sale of assets. These
assets include physical assets such as foreign direct investments in factories and
equipment, and financial assets such as shares of stock in a company abroad.
Host Countries
Promotion Restriction
• Financial incentives • Ownership restrictions
– Low or waived taxes – Prohibit investment
– Low-interest loans • Performance demands
• Infrastructure improvements – Local content
– Better seaports, roads, and requirements
telecom networks – Export targets
– Technology transfer
• Host countries also have a variety of methods to restrict incoming FDI. Again, these take
two general forms—ownership restrictions and performance demands.
• Ownership Restrictions: Governments can impose ownership restrictions that
prohibit nondomestic companies from investing in certain industries or from owning
certain types of businesses.
• Performance Demands: More common than ownership requirements are
performance demands that influence how international companies operate in the
host nation.
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Government Policy Instruments and F DI (2 of 3)
Home Countries
Promotion Restriction
• Insurance on assets abroad • Higher taxes on
• Loans and loan guarantees foreign income
• On the other hand, to limit the effects of outbound FDI on the national economy, home
governments may exercise either of the following two options:
• Impose differential tax rates that charge income from earnings abroad at a higher
rate than domestic earnings.
• Impose outright sanctions that prohibit domestic firms from making investments in
certain nations.