Documentos de Académico
Documentos de Profesional
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7
7
Learning objectives
Be familiar with current trends
regarding FDI in the world
economy.
Understand the different theories
of foreign direct investment.
Appreciate how political ideology
shapes a governments attitudes
towards FDI.
Understand the benefits and costs
of FDI to home and host
countries.
Be able to discuss the range of
policy
instruments
that
governments use to influence
FDI.
7-1
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructors manual. The PPT slides include additional notes that can be viewed by
clicking on view, then on notes. The following provides a brief overview of each
Power Point slide along with teaching tips, and additional perspectives.
Slide 7-3 Introduction
Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to
produce and/or market in a foreign country. Once a firm undertakes FDI it becomes a
multinational enterprise.
Another Perspective: Each year Fortune magazine publishes a list of the 500 largest
global corporations in the world. Fortune calls its list the "Global 500." This list can be
accessed at {http://money.cnn.com/magazines/fortune/global500/2006/}. The article
contains an excellent discussion of the role of global firms in the world economy.
FDI can take the form of a greenfield investment where a wholly new operation is
established in a foreign country, or it can take place via acquisitions or mergers with
existing firms in the foreign country.
Another Perspective: Another web site that provides an excellent discussion of the role of
multinational corporations in the world economy is available at
{http://www.oecdobserver.org/news/fullstory.php/aid/446/The_trust_business.html}.
Slide 7-5 Foreign Direct Investment in the World Economy
The flow of FDI refers to the amount of FDI undertaken over a given time period, while
the stock of FDI refers to the total accumulated value of foreign-owned assets at a given
time. Outflows of FDI are the flows of FDI out of a country, and inflows of FDI are the
flows of FDI into a country.
Slides 7-7-7-8 Trends in FDI
There has been a marked increase in both the flow and stock of FDI in the world
economy over the last 30 years.
Slides 7-9-7-12 The Direction of FDI
While the United States remains a top destination for FDI flows, South, East, and
Southeast Asia, and particularly China, are now seeing an increase of FDI inflows, and
Latin America is also emerging as an important region for FDI.
Slide 7-26
Political Ideology and Foreign Direct Investment
Ideology toward FDI ranges from a radical stance that is hostile to all FDI to the noninterventionist principle of free market economies. Between these two extremes is an
approach that might be called pragmatic nationalism.
Slide 7-27 The Radical View
The radical view argues that the MNE is an instrument of imperialist domination and a
tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist
home countries.
Slide 7-28 The Free Market View
According to the free market view, international production should be distributed among
countries according to the theory of comparative advantage.
QUESTION 3: Read the opening case on Starbucks and then answer the following
questions:
a) Initially, Starbucks expanded internationally by licensing its format to foreign
operators. It soon became disenchanted with this strategy. Why?
b) Why do you think Starbucks has now elected to expand internationally primarily
through local joint ventures, to whom it licenses its format, as opposed to using a pure
licensing strategy?
c) What are the advantages of a joint venture entry mode for Starbucks over entering
through wholly-owned subsidiaries? On occasion, Starbucks has chosen a wholly owned
subsidiary to control its foreign expansion (e.g. in Britain and Thailand). Why?
d) Which theory of FDI best explains the international expansion strategy adopted by
Starbucks?
ANSWER 3:
a) Starbucks initially approached its foreign expansion using licensing. However, the
company realized that a pure licensing format would not give it the control it desired.
b) Starbucks established a joint venture with a Japanese company, and licensed its
formula to the joint venture as a way to gain more control over its foreign expansion.
Expanding through joint ventures was also attractive because it gave Starbucks access to
knowledge of the local market.
c) The advantages of a joint venture entry mode for Starbucks as compared to whollyowned subsidiaries include access to knowledge of the local market and the opportunity
to share the costs and risks of expansion.
d) Internalization theory seems to provide some relevant explanation for Starbucks
decisions about its foreign strategy
Another Perspective: Students may want to explore Starbucks web site to see where its most
recent stores have opened, and what form of investment was used. The site is available at
{http://www.starbucks.com}. Click on international to see a list of countries where the
company operates.
Another Perspective: To expand this case, consider asking students to explore Starbucks recent
entry into the French market, and its strategic changes in its Chinese operations. Details on both
can be found at
{http://www.businessweek.com/globalbiz/content/apr2006/gb20060420_895395.htm?
chan=search} and
{http://www.businessweek.com/globalbiz/content/oct2006/gb20061025_712453.htm?
chan=search}.
QUESTION 4: You are the international manager of a US business that has just invented
a revolutionary new personal computer that can perform the same functions as existing
PCs but costs only half as much to manufacture. Several patents protect the unique
design of this computer. Your CEO has asked you to formulate a recommendation for
how to expand into Western Europe. Your options are (a) to export from the US, (b) to
license a European firm to manufacture and market the computer in Europe, and (c) to set
up a wholly owned subsidiary in Europe. Evaluate the pros and cons of each alternative
and suggest a course of action to your CEO.
ANSWER 4: In considering expansion into Western Europe, an international manager
might consider three options: FDI, licensing, and export. With export, assuming there are
no trade barriers, the key considerations would likely be transport costs and localization.
While transport costs may be quite low for a relatively light and high value product like a
computer, localization can present some difficulties. Power requirements, keyboards, and
preferences in models all vary from country to country. It may be difficult to fully
address these localization issues from the US, but not impossible. Since there are many
computer manufacturers and distributors in Europe, there are likely to be a number of
potential licensees. But by signing up licensees, valuable technological information may
have to be disclosed, and the competitive advantage may be lost if the licensees use or
disseminate this proprietary knowledge. FDI (setting up a wholly owned subsidiary) is
clearly the most costly and time consuming approach, but the one that best guarantees
that critical knowledge will not be disseminated and that localization can be done
effectively. FDI will also place you in the market into which you want to sell and allow
you to be near the consumer. Given the fast pace of change in the personal computer
industry, it is difficult to say how long this revolutionary new computer will retain its
competitive advantage. If the firm can protect its advantage for a period of time, FDI
may pay off and help assure that critical knowledge is not lost. If the innovation is not
core and can be easily copied, then licensing would allow the firm to get the quickest
large scale entry into Europe and make as much as it can before losing advantage.
CLOSING CASE: Cemexs Foreign Direct Investment
Summary
The closing case examines Cemexs rise to global status. Cemex is the worlds third
largest cement company and Mexicos largest multinational company. In Mexico, Cemex
is known for its efficient manufacturing and excellent customer service. Cemex began its
international expansion in an effort to reduce its reliance on the Mexican market, to
capitalize on demand in developing countries and its knowledge of developing companies
needs, and finally, to increase its value by acquiring inefficient companies and
transferring its skills to those companies. Cemex plans to continue its foreign expansion,
and believes that China and India will be important markets in the future. Discussion of
the case can revolve around the following questions:
In Khartoum, the site of an oil refinery, change is everywhere. Chinese know-how and
labor have helped make the economy one of the fastest growing in the world. In
downtown Khartoum hundreds of new villas targeted at the business elite are currently
under construction. However, Sudans newfound wealth has also caused the gap between
the rich and poor to widen. Prior to the discovery of oil in Sudan, the country had relied
on agriculture. Now, fed up with antiquated methods and droughts, many farmers are
abandoning their fields. Some have questioned why, given its newfound wealth, the
country has failed to modernize its agricultural sector. One former deputy finance
minister has warned that if the disparities between rich and poor are not addressed soon,
political unrest will increase rise and could cause investors to withdraw.
Complaints about the government are common. Some entrepreneurs complain that
corruption is making it difficult for them to succeed. Others echo the worry that wealth is
not being evenly shared. Osama Daoud Abdelatif has suggested that the government
limit its involvement in the economy to areas such as education and healthcare. For its
part, the government claims that it has changed, and notes that it no longer supports
Osama bin Laden, has settled two civil wars, and intends to be a good global citizen.
Still, not everyone is convinced. There is still concern over the situation in Darfur, and
how people in Sudan are treated. One businessman stated that if things fail to improve,
he will return to England where he was educated.
Discussion Questions:
1. Chinas 40 percent stake in Sudans oil industry has brought significant changes to
Sudan. Describe the benefits of the investments to the Sudanese. What, if any, are the
disadvantages of the investment? Consider the new challenges the investment brings to
Sudan.
2. China has made a significant investment in Sudan. What does China gain from making
this investment?
3. Sudans newfound wealth has raised concerns that the gap between rich and poor has
widened. Discuss this concern from the perspective of both the rich and the poor. Does
the government bear any responsibility to ensure the wealth is more evenly distributed?
Why or why not?
4. Some Sudanese businessmen have complained that American restrictions on imports
have made it difficult for them to conduct their business. In your opinion, should the
United States lift the sanctions? Are the sanctions achieving the desired goals?
INTEGRATING VIDEOS
There are also several longer video clips that can be integrated with the material
presented in this chapter. In particular, you might consider the following:
Title 16: Starbucks
Summary
Starbucks opened its first store in 1971. Today, the company, which has grown to over
6,000 stores located in 30 different countries, consumes 1.5 percent of the worlds coffee
production. A key issue challenging Starbucks is ensuring a consistent supply of
premium grade coffee beans for its roasters, a problem that is complicated by volatile
prices for coffee on the world market. In the last 15 years supply of coffee has exceeded
demand driving the price of coffee to 50 cents a pound. This price is less than what it
costs the farmer to produce that same pound of coffee. As a result many small farmers
have gone out of business or turned to growing other sustainable subsistence crops.
In an effort to promote the sustainability and stability of the industry, Starbucks has
formed long- term relationships with farmers agreeing to pay them a fair price for their
coffee to ensure the sustainability of this industry. Starbucks has also established a
program to offer bridge loans to farmers. These loans, which are paid back as soon as
coffee is picked, provide assistance to farmers that are having difficulty accessing credit
because of the unpredictability of their business.
Discussion Questions
1. What crisis did coffee growers face in the last 15 years? How has Starbucks program
to provide bridge loans helped coffee growers?
2. Starbucks consumes 1.5 percent of the worlds total coffee production. Why is it so
important to the company to maintain a consistent supply of premium coffee? Why did
Starbucks believe in building relationships with coffee growers?
3. How does lack of property rights in many tropical countries affect the coffee farmer?
4. Coffee prices have fallen dramatically over the last 15 years, so much so that prices are
currently below the cost of production. How do Starbucks agreements with its suppliers
protect them from this problem?
Exercise 2
The foreign direct investment statistics are provided by a variety of sources. One of the
most comprehensive sources is the UNCTADs Country Fact Sheets and can be accessed
by searching the term Country Fact Sheets at
{http://globaledge.msu.edu/ResourceDesk/}. The link to the Country Fact Sheets is
found under the globalEDGE category Research: Statistical Data Sources. On this
website, country specific information can be found by following the Country Fact
Sheets link, located on the right side of the page. Be sure to check the Resource Desk
only checkbox of the search function on the globalEDGE website.
Search Phrase: Country Fact Sheets
Resource Name: UNCTAD Country Fact Sheets
Website: {http://www.unctad.org/Templates/Page.asp?intItemID=2441&lang=1}
globalEDGE Category: Research: Statistical Data Sources
Alternatively, a lot of the same statistics, as well as detailed write-ups of the FDI
environment can also be reached through the Country Commercial Guides. See Chapter 5
Exercise 1 for instructions on how to reach the Country Commercial Guides through
globalEDGE.