Global Business

Foreign Direct Investment

Week 5
Foreign Direct Investment (FDI)
• Trend of FDI
• Increase in inward FDI & outward FDI
• Alternative mode of entry for trade due to trade barriers
• Popular FDI destinations: developing countries such as Asia, Eastern Europe
and Latin America due to economic growth, economic deregulation,
privatization
• Globalization of world market: to be close to major markets
• Direction of FDI
• USA (1980s – 2017) : large and wealthy domestic markets, stable economy
and political environment
• Developing countries: Eastern Europe, old Soviet Union, Southeast Asia, China
• Why?
Forms of Foreign Direct Investment
• Acquisition and greenfield investments
• What is acquisition as a form of FDI? Any example?
• What is greenfield investment as a form of FDI? Any example?
• How are they similar and different?
• Discussion: pros and cons of FDI compared to export & licensing
• To be discussed further in Week 11
• Discussion: pros and cons of acquisition and greenfield
• To be discussed further in Week 11
Burberry Shift Its Entry Strategy in Japan
• https://www.youtube.com/watch?v=l_W3HYovQVQ
• Why did Burberry initially choose a licensing strategy to expand its
presence in Japan?
• What limitations of licensing became apparent over time? Should
Burberry have expected these drawbacks to arise?
• Was terminating the Japanese licensing agreement and opening
wholly-owned stores the correct strategy for Burberry? What are the
risks here?
Pros and Cons of FDI
• Costs and benefits of FDI
• Nation’s perspective
• Firms’ perspective
• Inflow & outflow

Nation’s perspective Firms’ perspective

Home/Host
Inflow
Outflow
Benefits and Costs of FDI: Host Country
Perspective
• Host-country
• Benefits:
• Resource-transfer effects: capital, technology, management resources
• Employment effects: job creation
• Balance-of-payments effects: reduce trade deficit by local production (less import + more
exports)
• Effect of competition and economic growth: leading to innovation, price cut, customer
welfare
• Costs:
• Adverse effects on competition: drive out local firms, monopolize the mkt, lower customer
welfare / M&A  fewer # of players  less competition or monopoly
• Adverse effects on the balance of payments: outflow of earning to home country + imports of
material
• Possible effects on national sovereignty and autonomy
Benefits and Costs of FDI: Home Country
Perspective
• Home-country
• Benefits:
• Resource-transfer effects: increased revenue from host country + demand for home
country exports
• Employment effects: Needs for home country employees
• Learning valuable skills from the exposure to foreign market that can subsequently be
transferred back to the home country: reverse knowledge transfer
• Costs:
• Initial capital outflow : substituting for exports from home country
• Job loss
• Loss of value added
Benefits and Costs of FDI: Firm Perspective
• Benefits
• Efficiency (low cost): production efficiency, close to major markets,
government incentive, avoiding tariff
• Risk management
• Access to key resources: tangible and nontangible resources
• Costs
• New entrants: liability newness (Green field)
• Distance risk
• Learning costs
• Coordination costs
• Liabilities of foreignness
Firm Implications: How to Manage Multiple
FDIs
• What to consider for successful FDIs?
• Location
• Entry mode
• Home country factors
• Host country factors: competitions with local firms, foreign firms
• Synergy across multiple FDIs
• How to tackle challenges of managing multiple FDIs
• Horizontal vs. vertical FDI
• Horizontal FDI: investment between industrialized countries
• Vertical FDI: industrialized country – developing country
• Pros and cons of each approach?
Starbucks’ FDI (P.269)
• What drove Starbucks to start expanding internationally? Is this
strategy in the best of its shareholders?
• Why do you think Starbucks entered the Japanese market via a joint
venture with a Japanese company? What lesson can be drawn from
this?
• What drove Starbucks to shift from a joint venture strategy in China to
wholly owned subsidiary? What are the benefits here? What are the
potential risks?
FDI Theories
• Monopolistic Advantage Theory
• Hymer-Kindleberger Theory
• Country-specific & location specific vs firm-specific (capital, technology, know-how)
• To explain MNC from one countries to another countries despite liability of foreignness
• Internalization Theory
• Buckley & Casson
• Transaction costs: any examples of TC?
• To explain why firms choose FDI instead of licensing
• Eclectic Paradigm
• Dunning
• Comprehensive and generalizable theory
• O.L.I paradigm: ownership specific advantage (how to compete with local players?), internalization
advantage (why not export or licensing?), location-specific advantage (why to a specific country?)
• Licensing (O,L), Export (O, I), FDI (O,L,I)