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BU669 Session 2

BU669 Session 2. Negotiating FDI Relationships & Offshoring. Foreign Direct Investment. Growing importance – growth in capital flow > growth in flow of goods & services Inter-company product flows account for significant share of countries exports & imports Developed to developing countries

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BU669 Session 2

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  1. BU669 Session 2 Negotiating FDI Relationships & Offshoring

  2. Foreign Direct Investment • Growing importance – growth in capital flow > growth in flow of goods & services • Inter-company product flows account for significant share of countries exports & imports • Developed to developing countries • MNE still drive a lot of the action • Stakeholders – governments, MNE, local companies • Simulation – window into the dynamics

  3. Players in Negotiations • 3 Multinationals – Megatronics, Eurodata, Tanaka • 1 Government– China – but local governments as well • 2 local companies – Majestic, Shanghai Information Age Technologies

  4. Issues For Individual Players • MNCs – China? Type & size of Plant? • Local Companies – Enter industry? Alone or Partner? Plant type & size? • Government – Industry structure & ownership to allow? Incentives? Economic development?

  5. Issues Between MNCs & Local Companies • License, subcontract, JV, other? • Ownership %s • Mg’t responsibilities & Control • Technology transfer • Local market or export • Size & Type of plant • Transfer pricing – imports/exports

  6. Issues Between MNCs & Government • Plant size & type • Location • Infrastructure development & support • Number of manufacturers allowed • Tariff protection • Foreign ownership allowed • Technology transfer conditions • Pricing regulations • Export and local content requirements • Tax & financial incentives • Repatriation of profits

  7. Contributions of MNEs 11-9

  8. Issues Between Local Companies & Governments • Incentives & Special consideration • Degree of support with MNCs • Number of manufacturers • Tariff Protection • Tax, financial & export incentives • Plant location

  9. Issues Between Local Companies • Cooperate or compete • If cooperate – independent or joint operations?

  10. Issues Between Governments • Cooperate or compete? • Free Trade?

  11. Part Two Off-shoring

  12. Canadian Industry Punching Out – Stronger Dollar and Low-cost Alternatives are sending Jobs Offshore – G&M Jan23, 2004 • Nortel – 1500 jobs • Levis Strauss & Company – 1200 jobs • Bauer Nike Hockey – 321 jobs • Camco (refrigerators & stoves) – 800 jobs • Roots – 200 jobs • Swift Denim – 600 jobs • International - Multi-foods – 135 jobs • Canam Manac (truck trailers) – 245 jobs

  13. Is Your Job Next? • By 2015 – roughly 3.3 million U.S. business processing jobs will have moved offshore • U.S. service jobs lost to offshoring will increase at a rate of 30% to 40% over next five years • Software developers - $60/hr in U.S. vs $6/hr in India

  14. Is offshoring a good thing or not? For Canada?

  15. Offshoring’s Value to India Benefit per $1 of U.S. off-shore Spending in 2002 • Offshoring Sector Labour 0.10 Profits 0.10 • Local Suppliers 0.09 • Government Taxes Central 0.03 State 0.01 • Net Benefit $0.33

  16. Example: Call Centre in India

  17. Foreign Direct Investment’s Effect on Developing countries

  18. Competition Boosts Productivity

  19. Exploding the Myths of Offshoring – Mckinsey June 2004 Benefits to NA • Corporate savings • Deal for consumers • Additional exports • Repatriated profits • Productivity & new jobs??? • Challenge – address those displaced in the transition

  20. Don’t Blame Trade for US Job Losses – Mckinsey 2005 • 2.85 mil manufacturing jobs lost in US during 2000-2003 Why? • 11% or 314,000 due to trade – offshore imports • Real contributor – weak domestic demand, rapid productivity growth, dollar’s strength which hurt exports • Solutions – stimulate domestic demand, cut deficit,push countries with artificially cheap currencies to appreciate against the US$, trade-adjustment-assistance programs

  21. Another Concern – Innovation Blowback • Wal-Mart stores imports from China – 1% of GDP – company is helping Chinese manufacturers target shoppers in US & Europe • Citigroups Chinese M&A unit – outbound deals make up lion share of its pipeline • Western companies serving low-income customers in emerging markets are using that experience to address needs of value segments in developed markets

  22. Product & Process Innovation to Address Broader Emerging Market Needs • Production-driven modularity – process networks – e.g., motorcycles • Customer-driven modularity – Cummins engines/generators • Process-driven services – Aravind Eye Care System in India • Key message to Westerners – if you are participating in the mass-market segment of emerging economies, you are not developing the capabilities you will need to compete at home

  23. Summary • FDI importance & impact • Stakeholders involved & perspectives • Negotiations & Deal Structuring • Off-shoring – strategic fit, economic impact – micro & macro • Next Day – China seminars

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