International Business. Wendy Jeffus Harvard Summer School. Introduction. Administration Project Proposals Due Friday’s Section Midterm Review Chapter 6 Slides Foreign Direct Investment: Dubai Case Study: Starbucks’ Foreign Direct Investment Chapter 7: Foreign Direct Investment
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Harvard Summer School
Harvard Summer School
Chapter 7: Foreign Direct Investment
Market imperfections are factors that inhibit markets from working perfectly
Lower labor costs
Decision to invest in
the US due in part
to quotas on imports.
In addition, believed
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
Location specific factors. These are external to the firm including factor endowment, transportation cost, government regulation, and infrastructure factors.
Firm specific unique competitive advantage that overcome the disadvantages of competing with firms in their own market e.g. name recognition and other core competencies.
Cost advantage from vertical and
horizontal integration, due to transaction
cost caused by market failure
Examples of types of location-specific
factors are markets, resources, production costs,
political conditions, cultural/linguistic affinities,
concentration of knowledge development .
Examples benefits from controlling
the foreign business activity,
rather than hiring an independent
local company to provide the service
Examples of types of
ownership factors technology,
knowledge, patent, know-how, size.
Photo source: “For Bank of America and Merrill, Love Was Blind”
Photo Source: http://www.albhydrocarbon.com/logot/bpamoco4.gif
Photo source: Company websites
First, No Country has adopted the
Radical or Free Market views in their pure forms
FDI benefits both countries
“Come on In”
MNEs are instruments
of imperialist domination
Mexico, S. Korea
Note: While the U.S. is seen as one of the most open markets, the country still prohibits
certain FDI (e.g. investment from Iran & Cuba)
Benefits to Host Country
Supply of capital and other resources
BOP (Balance of Payments)
Capital inflow, import substitution & subsequent exports
Increase in consumer choice, lowers prices
Costs to Host Country
Loss of national sovereignty
Foreign parent has no commitment to host country
Fear of monopoly power
Import of inputs from abroad
Outflow of foreign subsidiary's earnings
Benefits to Home Country
Inflow of foreign earnings
Foreign subsidiaries create demand for home-country exports
Reverse-resource transfer effect
Foreign subsidiary learns skills abroad and transfers knowledge home
Costs to Home Country
Initial capital outflow
Export of jobs abroad
Encourage Outward FDI
Government backed insurance programs
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
Example: Britain once taxed foreign earnings higher than domestic earnings.
Prohibit national firms from investing in certain countries
U.S. discourages investment in Cuba & Iran
Encourage Inward FDI
Low interest loans
Discourage Inward FDI
Prohibited operating in certain fields
Require that a significant proportion of the equity be owned by local investors
Aberdeenshire is a predominantly rural area in the north east of Scotland.
Salary: Average gross weekly earnings are £484.90.
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 Aberdeenshire’s economic base, leading to rapid population growth.
Latest figures (2006) Source: http://www.aberdeenshire.gov.uk/statistics/area/aberdeenshire_profile2007.pdf
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;
“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.
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.””***
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
Benefits to the host country
“The development could bring £150m to the local economy over the next decade, creating 400 jobs.”
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.”
Ian Dunlop, area director for Visit Scotland*
Costs to the host country
“will effectively destroy the "jewel in the crown" of Britain's shifting sand dune systems…the main championship course at Menie would involve "biblical amounts" of sand being moved at a protected site of "national" environmental importance.”
Dr Jim Hansom, expert on coastal research**
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.****
"We are approaching it in a co-operative manner, it has huge potential for the area and we recognise that, but we must protect the heritage.“
Scottish National Heritage (SNH) Grampian area manager Ron MacDonald*
Sand dunes in the area are designated to be of “Special Scientific Interest (SSSI)”
Michael Forbes owns 23 acres on the Scottish cast that Donald Trump wants and he’s 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.
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.***
Magnus Linklater is backing Donald Trump.
He’s “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
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.+
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++
Photo Source: http://upload.wikimedia.org/wikipedia/commons/thumb/b/bb/Scotland_Lewis_Stornoway_castle.jpg/800px-Scotland_Lewis_Stornoway_castle.jpg
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.
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."
Donald Trump Jack Nicklaus
http://news.scotsman.com/scotland/Goahead-for-massive-golf-resort.4205726.jp; Photo Ury House wikipedia.org
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 it’s 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.
Please note, I have decided to include this as a bonus question
on your mid-term exam. (you can earn up to 20 points)
The maximum score on the mid-term is 100 points (100%).