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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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International business

International Business

Wendy Jeffus

Harvard Summer School


  • 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

  • We Can’t All Play the Violin…

Foreign direct investment
Foreign Direct Investment

  • 05/09 - The UAE expects to remain the main recipient of foreign direct investment in the Gulf Arab region.


Case assignments
Case Assignments

  • Starbuck’s: FDI

  • Present a 5-10min (timed) assessment of the case.

  • All group members must participate.

Wendy jeffus harvard summer school

Wendy Jeffus

Harvard Summer School

Chapter 7: Foreign Direct Investment

What is the definition of fdi
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

Market imperfections
Market Imperfections

Market imperfections are factors that inhibit markets from working perfectly




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.

Dell (U.S.)

call centers

in India

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 investment1
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

  • For your final project see:

Where to invest
Where to Invest?

  • Theory versus Practice

  • The decision to invest abroad is often a stage in the firm’s 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
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

Location Advantage:

Location specific factors. These are external to the firm including factor endowment, transportation cost, government regulation, and infrastructure factors.

Ownership Advantage:

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


Eclectic Paradigm (O-L-I)

Examples of types of location-specific

factors are markets, resources, production costs,

political conditions, cultural/linguistic affinities,

concentration of knowledge development .



wine industry




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.





auto industry

Forms of fdi
Forms of FDI

  • Greenfield operations:

    • Usually only when an appropriate target is unavailable.

  • Mergers and acquisitions:

    • Quicker to execute

    • Acquire valuable strategic assets

    • Believe in the ability to increase the efficiency of the acquired firm.

A key point
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.

John Thain,


Ken Lewis,


Photo source: “For Bank of America and Merrill, Love Was Blind”



Who s the boss
Who’s “the Boss”

  • BP/Amoco Merged in 1998

    • A popular joke in Amoco hallways goes: What’s the British pronunciation of BP Amoco?

      • “BP” – the Amoco is silent.

  • 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.

    • Chicago, closed doors, “aspirations,” strategic planning counsels, and strict policies

  • They even spelled organization and labor differently!

Photo Source:

Foreign direct investment2
Foreign Direct Investment

  • Horizontal FDI - investment in the same industry

    • Cemex (Mexico’s 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 is basically selling “know-how” (i.e. technology, brand, etc.)

  • U2 Has Licensed it’s song “Get on Your Boots” for the World Cup Games.


  • June 10, 2010 For the first time FIFA has licensed imagery, including mascots and logos, to be transformed into a clothing brand, through Singapore-based Global Brands Group.


Licensing vs fdi
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 can’t replicate your competitive advantage.

      • Toyota thinks foreign companies don’t get it.

Photo source: Company websites


  • Franchising is the service industry’s version of licensing.

    • McDonald’s chooses franchising because…

      • Fast-food can’t 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.

Political ideology
Political Ideology

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)

Pragmatic nationalism
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

  • Even free market economies block FDI

    • protect infant industry

    • anti-dumping

    • national security

Foreign direct investment host
Foreign Direct Investment (Host)

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

Foreign direct investment home
Foreign Direct Investment (Home)

Benefits to Home Country


Inflow of foreign earnings

Employment effects

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 substitution

Export of jobs abroad

Policies and fdi home
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

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

Policies and fdi host
Policies and FDI (Host)

Encourage Inward FDI

Tax concessions

Low interest loans


Discourage Inward FDI

Ownership restraints

Prohibited operating in certain fields

Require that a significant proportion of the equity be owned by local investors

Performance Restraints

Local Content



Aberdeenshire scotland
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.

This is £18.80 lower than the Scottish average and £121.40 lower than in Aberdeen.

Unemployment: 1.0%.

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:

Aberdeenshire scotland1
Aberdeenshire, Scotland

Menie Estate, close to the North Sea near Balmedie.



Donald trump
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.

Trump in scotland
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.””***




Photo source:

Fdi in scotland
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.”

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

Environmental Concerns

“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.

Don’t Comb

Over Here

We Don't


You Hair

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;

Bargaining chips county antrium the lewis castle
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++



Photo Source:

Nicklaus in scotland
Nicklaus in Scotland

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

X; Photo Ury House

Plane stupid
Plane Stupid

  • 03/14/09 A group that calls themselves “Plane Stupid” protested the expansion of the Aberdeen airport, blaming Trumps Proposed Golf Resort.

Enter sarah malone
Enter: Sarah Malone

Sarah malone
Sarah Malone

  • 07/07/09 “Sarah Malone to Trump tycoon's opponents”

  • A formidable woman is poised to drive forward Donald Trump’s golfing plans for Balmedie in the face of local anger


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.

Case questions
Case Questions…

  • Should Malone accept this position?

  • What issues should she consider when making her decision?

  • What are the relevant benefits and costs of this investment for Scotland and for the local community? Do the benefits outweigh the costs?

  • Is there a win-win solution?

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%).

The negotiation process
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
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 party’s time horizon

Stuff to do this weekend
Stuff to do this weekend…

  • Optional Review Session on Friday…

    • Next week is July 4th