CGA07

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Published on January 13, 2009

Author: aSGuest10337

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Competing in the Global Arena : Competing in the Global Arena Dr. A. Sybrandy RITI 2005 VII The Place of FDI : The Place of FDI Foreign Direct Investment [FDI] : Foreign Direct Investment [FDI] FDI involves the ownership and control of a company in a foreign country. Differs from portfolio investments, which are of a financial nature (stocks, bonds, etc.). FDI may be made in one of two ways: New venture Acquisition Motives for FDI : Motives for FDI Expand sales Acquire resources Minimize risk Political issues/motives Why FDI? : Why FDI? Sell products already sold successfully at home (1960s). Lowering production costs by producing in low-cost countries for sale in other countries (1970s & 80s). Gaining access to new technology (1990s). Overall, four sets of factors may be identified: ? Supply side Demand side ? ‘Process’ related Risk Factors These factors overlap in implementation! Supply Side Factors : Supply Side Factors Lower production costs. National comparative advantage: wages, real estate, etc. Lower delivery costs. Transportation, Tariffs, etc. Acquisition of raw materials. Control rather than buy in market. Supply Side Factors (cont.) : Supply Side Factors (cont.) Offshore assembly or Foreign sourcing. Production for sales outside host; a subcategory of the first factor. Assembly/Production may be for home market. Portfolio of production sources. Risk reduction: Suppliers, Material types, Production, Distribution (e.g., railroad strike). Access to technology and skills. Invest in areas where key competitive advantages can be obtained. Factors in Choosing FDI for Resource Acquisition : Factors in Choosing FDI for Resource Acquisition Savings through vertical integration Savings through rationalized production Gain access to cheaper or different resources and knowledge Need to lower costs as product matures Gain governmental investment incentives Demand Side Factors : Demand Side Factors New markets. Other options must be considered! exports, licensing, etc. Restriction of imports. Quotas may restrict access to market. Local presence. Potentially more sales; Customer confidence, after sales service, easier adaptation to local conditions, etc. Demand Side Factors (cont.) : Demand Side Factors (cont.) “Buy National” rules. Especially governments (including U.S.) Customer biases may have similar effect. Good corporate citizen. Build image by hiring locals, paying local taxes, participating in society, etc. Response to rivals’ threats. Enter competitors’ (home) markets. Factors in Choosing FDI for Expansion of Sales : Factors in Choosing FDI for Expansion of Sales Transportation Lack of domestic capacity Low gains from economies of scale Trade restrictions Country-of-origin effects such as barriers Lower production costs abroad Changes in comparative costs Factors in Choosing FDI for Risk Minimization : Factors in Choosing FDI for Risk Minimization Diversification of customer base (same as sales expansion) Diversification of supplier base (same as resource acquisition) Following customers Preventing competitors’ advantage Factors in Choosing FDI for Political Objectives : Factors in Choosing FDI for Political Objectives Only applies if Gov’t owns or influences FDI to implement/support policy. Influence foreign companies Political motives to reduce security risks Gaining control of resources gives home countries some political control Foreign Direct Investment and Control : Foreign Direct Investment and Control International businesses want to control their foreign operations so they achieve their global objectives Control must accompany investment Defining direct investment is arbitrary Companies are reluctant to transfer vital resources to another organization without control Capital Patents Trademarks Management know-how Control and Costs : Control and Costs Control inherent in FDI may: Decrease operating costs Increase rate of technology transfer Parent and subsidiary share common corporate culture Company can use its’ own managers Company can avoid protracted negotiations with another company Company can avoid problems of enforcing and agreement Methods for Making FDI : Methods for Making FDI Assets employed: usually an international capital movement that crosses borders Acquisition: purchase of existing company Easy to execute Useful if local requirements mandate localized adoption to operate Foreign personal may be hard to hire Best if international company is attempting to acquire knowledge Gain goodwill and brand identification Building: using local resources to start from construct facilities and build a labor pool Investor’s Advantage : Create supremacy over similar companies in countries of interest (monopoly advantage) May be able to borrow capital at a lower interest rate than companies from other countries Foreign company’s currency may have a higher buying power To sell more efficiently companies establish direct investments globally Investor’s Advantage Direct Investment Patterns : Direct Investment Patterns Location of Investment : Location of Investment FDI in Developed Countries : FDI in Developed Countries Most FDI is from developed countries TO developed countries Markets are larger in developed countries Political turmoil in emerging economies has discouraged investors Developed countries are committed to liberalizing direct investments among members Taxes Access to local capital Government procurement Flow of FDI : Flow of FDI

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