Global business environment
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Global Business Environment. Economic environment: capital movement, FDI. Readings. World Investment Report 2009 . Overview. pp. 4-22. http://www.unctad.org/en/docs/ wir2009overview_en.pdf The OLI Paradigm. http://www.investmentsandincome.com/investments/oli-paradigm.html.

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Global Business Environment

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Global Business Environment

Economic environment: capital movement, FDI


Readings

World Investment Report 2009. Overview. pp. 4-22. http://www.unctad.org/en/docs/wir2009overview_en.pdf

The OLI Paradigm. http://www.investmentsandincome.com/investments/oli-paradigm.html


International movements of capital

  • Types of capital movements:

    • Official flows (grants)

    • International borrowings and lendings

  • Portfolio investments

  • Foreign direct investments


FDI

Foreign direct investment refers to investment in which a firm in one country directly controls or owns a subsidiary in another.

If a foreign company invests in at least 10% of the stock in a subsidiary, the two firms are typically classified as a multinational corporation.

  • 10% or more of ownership in stock is deemed to be sufficient for direct control of business operations.

  • In addition, international borrowing and lending sometimes occurs between a parent company and its subsidiary


Location and internalization

Why are multinational corporations created and why do they undertake direct foreign investment?

  • Location: why is a good produced in two countries rather than in one country and then exported to the second country?

  • Internalization: why is production in different locations done by one firm rather that by separate firms?


Location

Why production occurs in separate location is often determined by

  • the location of necessary factors of production:

    • mining occurs where minerals are;

    • labor intensive production occurs where relatively large pools of labor live.

  • transportation costs and other barriers to trade may also influence the location of production.

  • These factors also influence the pattern of trade.


Internalisation

Internalization occurs because it is more profitable to conduct transactions and production within a single organization than in separate organizations. Reasons for this include:

  • Technology transfers: transfer of knowledge or another form of technology may be easier within a single organization than through a market transaction between separate organizations.

    • Patent or property rights may be weak or non-existent.

    • Knowledge may not be easily packaged and sold.


Internalisation

  • Vertical integration involves consolidation of different stages of a production process.

    • Vertical integration would involve consolidation of one firm that produces a good that is used as an input for another firm.

    • This may be more efficient than having production operated by separate firms.

    • For example, having farms and flour mills consolidate into one organization to make flour may be more efficient that have farms and flour mills as separate organizations.


Trends in FDI

  • Flow and stock increased in the last 20 years

  • In spite of decline of trade barriers, FDI has grown more rapidly than world trade because

    • Businesses fear protectionist pressures

    • FDI is seen a a way of circumventing trade barriers

    • Dramatic political and economic changes in many parts of the world

    • Globalization of the world economy has raised the vision of firms who now see the entire world as their market


The Direction of FDI

  • Historically, most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in other markets

    • The US has been the favorite target for FDI inflows

  • While developed nations still account for the largest share of FDI inflows, FDI into developing nations has increased

    • Most recent inflows into developing nations have been targeted at the emerging economies of South, East, and Southeast Asia


Costs of FDI to Host Countries

  • Adverse effects on competition

  • Adverse effects on the balance of payments

    • After the initial capital inflow there is normally a subsequent outflow of earnings

    • Foreign subsidiaries could import a substantial number of inputs

  • National sovereignty and autonomy

    • Some host governments worry that FDI is accompanied by some loss of economic independence resulting in the host country’s economy being controlled by a foreign corporation


Political Ideology and FDI

Radical

View

Pragmatic

Nationalism

Free

Market


The Radical View

  • Marxist view: MNE’s exploit less-developed host countries

    • Extract profits

    • Give nothing of value in exchange

    • Instrument of domination, not development

    • Keep less-developed countries relatively backward and dependent on capitalist nations for investment, jobs, and technology


The Radical View

  • By the end of the 1980s radical view was in retreat

    • Collapse of communism

    • Bad economic performance of countries that embraced the radical view

    • Strong economic performance of countries who embraced capitalism rather than the radical view


The Free Market View

  • Nations specialize in goods and services that they can produce most efficiently

  • Resource transfers benefit and strengthen the host country

  • Positive changes in laws and growth of bilateral agreements attest to strength of free market view

  • All countries impose some restrictions on FDI


Pragmatic Nationalism

  • FDI has 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


Regional development implications of FDI

  • Post Communist Eastern Europe, e.g. Czech Republic, Slovenia

  • Foreign direct investment (FDI) has been accorded a central role in the post-communist economic transformation of Central and Eastern Europe.

  • Regional effects of FDI in Central Europe (Czech Republic, Hungary, Poland and Slovakia) in the 1990s.

  • Defining FDI’s role in regional economic transformations

    • Intensification of uneven development

    • Development of a Dual Economy

    • Failure to develop linkages with local and regional economies

    • Contribution to increased regional economic instability


Motivations of foreign direct investments

  • Resource-seeking investments:

    • Row materials, energy, natural resources,

    • Low-cost labour,

    • Low-cost human capital.

  • Market-seekinginvestments:

    • Green-field investments,

    • Brown-field investments,

    • Mergers & acquisitions.


Motivations of foreign direct investments

  • Efficiency-seekinginvestments:

    • Factor proportions,

    • Differentiation of products,

    • Economy of scales.

  • Strategic-advantage-seeking investments:

    • Long-term advantage of acquisition.


Main sources of advantages of multinational firms

  • Ownership-specific advantages

  • Location-specific advantage

  • Internalization (technology transfer, vertical integration)

    = OLI paradigm (Dunning)

  • Dunning: productivity of US firms in UK in the 1950’s – US firms in the UK are more productive than UK firms (because of best managerial skills, know-how, etc.)


Vernon’s Product Life Cycle (PLC) theory

Phases: home production; export; export of capital; foreign production.

  • Porter – strategic management

  • Three groups of international enterprises

    • Exporting domestic enterprise,

    • Multi-domestic enterprise (management in every country, negligible central co-ordination)

    • Global enterprise (centrally co-ordinated).


Strategic alliances

Main specificities ofstrategic alliances:

  • Basic autonomy of the partners remain,

  • Long-term,

  • Mutually advantageous co-operation,

  • Resources make available for one another,

  • Integration of specific functions.


Advantages and disadvantages for recipient countries

Advantages:

  • Increase of financial resources,

  • Foreign trade sufficit,

  • Positive effect on employment (both direct and indirect),

  • Technology transfer,

  • Import of know-how,

  • Better structure of foreign relations,

  • Diminution of risks.


Advantages and disadvantages for recipient countries

Disadvantages

  • Less economic autonomy,

  • Technological dependence,

  • Local resources in foreign control,

  • Increasing foreign involvement,

  • Undesired structural changes,

  • Increasing risks (profit),

  • Bad structure of foreign relations.


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