International Business

Wendy Jeffus
Harvard Summer School

Introduction

Administration

Fridays Section John Harvards 1:00-3:30pm

Ethics Question (Submit Hard Copy to Brian)

July 8th Project Proposals
Location: 33 Dunster Street, Cambridge, MA 02138
www.johnharvards.com

Chapter 6 Slides
Worlds Largest Companies
Participation Ranking
Foreign Direct Investment: Dubai
Case Study: Starbucks Foreign Direct Investment
Case Study: Cemexs Foreign Direct Investment
Chapter 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 & Present

1991

2005

Dubai Burj al-Arab

Dubai Palm and the World

Dubai Burj Dubai

Dubai Dubailand Ski Dome

Foreign Direct Investment

05/09

- 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 Assignments
Starbucks:

FDI
Cemexs: FDI
Present

a 5-10min (timed) assessment of the

case.
All group members must participate.

Chapter 7: Foreign Direct Investment

Wendy Jeffus
Harvard Summer School

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 period
The stock of FDI refers to the total accumulated value
of foreign owned assts at a given time
The outflows of FDI refer to the flow of FDI out of a
country
The inflows of FDI refers to the flow of FDI into a
country

Foreign Direct Investment

fDi

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 Practice

The 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 source

Fear of losing a market
The bandwagon effect
Strong competition from abroad in the home market
Connections familiarity with a market personal interest

The Eclectic Paradigm

John 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)

France has government support for
its wine industry.
Location Advantage:
Location specific factors. These are external to the firm
including factor endowment, transportation cost, government
regulation, and infrastructure factors.

Ownership Advantage:

Internationalization:

Firm specific factors including: technology,

patent, process, name recognition,
and other core competencies.

Cost advantage from vertical and

horizontal integration, due to transaction
cost caused by market failure

The Japanese auto industry

transfers its perception of quality

OLI

Microsoft transfers its

technology from home, abroad

Forms of FDI
Greenfield

Usually only when an appropriate target is

unavailable.

Mergers

operations:

and acquisitions:

Quicker to execute
Acquire valuable strategic assets
Believe in the ability to increase the efficiency of the
acquired firm.

A Key Point
Mergers

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 Boss

BP/Amoco Merged in 1998

BP was a giant family of small businesses

London, glass walls, peer groups, and hard targets.

Amoco operated under a classic pyramid with heavy internal

bureaucracy.

A popular joke in Amoco hallways goes: Whats the British pronunciation

of BP Amoco? BP the Amoco is silent.

Chicago, closed doors, aspirations, strategic planning counsels, and

strict policies

They even spelled organization and labor differently!

Market Imperfections
Market

imperfections are factors that inhibit

markets from working perfectly

Regulations
Tariffs
Dell (U.S.)
Quotas
call centers
in India
Transportation costs
Management experience
Lower labor costs

Toyota (Japan)
Decision to invest in
the US due in part
to quotas on imports.
In addition, believed
lean production
was hard to replicate.

IBM & Microsoft (U.S.) have software

development in India
P&G (U.S.) moved some of its
back-office accounting to the Philippines

Foreign Direct Investment

Horizontal 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 industries

Forward Vertical downstream investment in outputs (i.e. customers)

Volkswagen bought dealers in the US

Licensing
Licensing

is basically selling know-how (i.e.

technology, brand, etc.)

Licensing vs. FDI

Choose

FDI when

Need to protect know-how

RCA licensed

its color TV technology to Matsushita

and Sony (oops).

Want tight control

Kodak

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

Franchising

Franchising is the service industrys version of licensing.

McDonalds chooses franchising because

Fast-food cant be exported
Economizes on costs and risks of foreign business
Brand is easier to protect (than technology, for example)
Control can be communicated through contracts and company
visits.

Decision Making Grid For FDI

Political Ideology
First, No Country has adopted the
Radical or Free Market views in their pure forms

Radical
View
MNEs are instruments
of imperialist domination
Cuba
Venezuela
Iran

Pragmatic
Nationalism

Free
Market
FDI benefits both countries
Come on In
U.S.
U.K.

Pragmatic Nationalism
The

pragmatic nationalist view is that FDI has

both benefits and costs

Allow FDI if benefits outweigh costs

Block

FDI that harms indigenous industry

Court FDI that is in national interest
Tax breaks
Subsidies

Aberdeenshire, Scotland

Aberdeenshire is a predominantly rural

area in the north east of Scotland.

Population: 236,300
Salary: Average gross weekly earnings
are 484.90.

Unemployment: 1.0%.

This is 18.80 lower than the Scottish

average and 121.40 lower than in
Aberdeen.
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.html
Latest figures (2006) Source: http://www.aberdeenshire.gov.uk/statistics/area/aberdeenshire_profile2007.pdf

Aberdeenshire, Scotland
Menie

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.stm

Donald Trump

I have never seen such an unspoilt and dramatic sea

side landscape and the location makes it perfect for
our development. Donald Trump
March 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 Scotland

June 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-cheer
Photo 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 Scotland
Benefits to the host country
Economic Development

The development could bring 150m

to the local economy over the next
decade, creating 400 jobs.

Costs to the host country

Environmental Concerns

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.

will 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.

Ian Dunlop, area director for Visit

Scotland*

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 cooperative manner, it has huge potential

for the area and we recognise that, but
we must protect the heritage.

*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=242
Sand dunes in the area are designated to be of Special Scientific Interest (SSSI)

Dr Jim Hansom, expert on coastal

research**

Scottish National Heritage (SNH)

Grampian area manager Ron
MacDonald*

Opposition

Michael 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.
Dont Comb
Over Here

Locals 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.***
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-cheer

't
Don
e
W ant
W
r
Hai
You

Support

Magnus 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).

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 habitat
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
http://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 Castle

December 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.php
Photo Source: http://upload.wikimedia.org/wikipedia/commons/thumb/b/bb/Scotland_Lewis_Stornoway_castle.jpg/800px-Scotland_Lewis_Stornoway_castle.jpg
+

++

X
Nicklaus in Scotland

Jack Nicklaus

June 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.

Donald Trump

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.org

Plane Stupid
03/14/09

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

05/26/09
Donald 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 Malone
07/07/09

Sarah Malone to Trump tycoon's

opponents
A formidable woman is poised to drive
forward Donald Trumps golfing plans for
Balmedie in the face of local anger
http://www.timesonline.co.uk/tol/news/uk/scotlan
d/article6445223.ece
The 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 Malone

Which 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 Country
Supply of capital and
other resources

Capital inflow, import

substitution & subsequent
exports

Competition

Technology
Management

Employment
BOP (Balance of Payments)

Costs to Host Country

Loss of national
sovereignty

Increase in consumer
choice, lowers prices

Foreign parent has no

commitment to host
country

Fear of monopoly power

BOP

Import of inputs from

abroad
Outflow of foreign
subsidiary's earnings

Foreign Direct Investment (Home)

Benefits to Home Country
BOP

Inflow of foreign earnings

Employment effects

Costs to Home Country

BOP

Foreign subsidiaries create

demand for home-country
exports

Reverse-resource
transfer effect

Foreign subsidiary learns

skills abroad and transfers
knowledge home

Initial capital outflow

Export substitution

Export of jobs abroad

Policies and FDI (Home)

Encourage Outward FDI

Government backed
insurance programs
Capital assistance
Tax incentives
Political pressure

Example: Japan
responded to political
pressure from the U.S. in
the 80s and relaxed
informal barriers

Discourage Outward FDI

Limit capital outflows

Tax incentives to invest at
home

Prohibit national firms from

investing in certain
countries

http://www2.toysrus.co.jp/truj/english/index.html

Example: Britain once

taxed foreign earnings
higher than domestic
earnings.

U.S. discourages
investment in Cuba & Iran

Policies and FDI (Host)

Encourage

Inward

FDI

Tax concessions
Low interest loans
Grants/subsidies

Discourage

FDI

Inward

Ownership restraints
Prohibited

operating in
certain fields
Require that a significant
proportion of the equity
be owned by local
investors

Performance Restraints
Local

Content

Hiring
Exports

The Negotiation Process

The negotiation process has been characterized as occurring within

the context of the four Cs

Common interests
Conflicting interests
Compromise
Criteria

Negotiation & Bargaining Power

The outcome of any negotiated agreement depends on

the relative bargaining power of both parties
Bargaining power depends on three factors

The value each side places on what the other has to offer
The number of comparable alternatives available to each side
Each partys time horizon

Resource for your Final Project

http://www.fdi.net/country/

Stuff to this weekend

Optional

Review Session on Friday

Next week is July 4th

http://www.faneuilhallmarketplace.com/

http://www.cityofboston.gov/
FreedomTrail/bostoncommon.asp
http://www.marinabaybeachclub.com/