Chapter 13
Direct Foreign Investment Lecture Outline
Motives for Direct Foreign Investment (FDI)
Motives
Revenue-Related
Cost-Related
Motives
Comparing Benefits of FDI Among Countries
Comparing Benefits of FDI Over Time
Benefits of International Diversification
Diversification Analysis of International Projects
Diversification Among Countries
Decisions Subquent to FDI
Host Government Views of FDI
Incentives to Encourage FDI
Barriers to FDI
Government-Impod Conditions to Engage in FDI
Impact of the Direct Foreign Investment Decision on an MNC’s Value
Chapter Theme
2017四级答案
The main purpo of this chapter is to illustrate why MNCs often u FDI and to suggest the various factors involved in the FDI decision. The specifics involved in quantifying costs and benefits of FDI are discusd in the following chapter. Thus, this chapter should be covered in general terms as to the costs and benefits of FDI. The chapter implicitly suggests that each firm may benefit from FDI by
capitalizing on some unique perceived advantages of the foreign market. Yet, all FDI decisions relate to the MNC’s overall risk and return objectives.
Topics to Stimulate Class Discussions
1. Why would a large advanced MNC consider FDI in some less developed country?
2. Assume that you produce plastic computer pieces for computer companies. The pieces require
very little technology. Where would you like to establish FDI? (The point of this question is to force consideration of various characteristics that are incorporated in a FDI decision.)
3. What factors would be considered when deciding whether a subsidiary should reinvest earnings or
remit them to the parent?
4. The FDI decision is related to marketing, finance, and management. What is the role of each area
in the FDI decision? (This question is not explicitly covered in the text but allows students to consider the differences in disciplines as related to the broad corporate function of FDI.)
5. Do you think FDI is primarily intended to reduce production costs or increa sales? Discuss. Critical debatereuters
Should MNCs Avoid FDI in Countries with Liberal Child Labour Laws?
Proposition Yes. An MNC should maintain its hiring standards, regardless of what country it is in. Even if a foreign country allows children to work, an MNC should not lower its standards. Although the MNC forgoes the u of low-cost labor, it maintains its global credibility.
Opposing view No. An MNC will not only benefit its shareholders, but will create employment for some children who need support. The MNC can provide reasonable working conditions and perhaps may even offer educational programs for its employees.
With whom do you agree? Review sites such poratewatch
and contrast www.cleanclothes/companies/adidas00-05-05.htm with /en/overview/corporate_governance/a/default.asp
2013考研英语真题also su.edu/~dboje/AA/academics_reebok.html
for a more sympathetic view of MNCs e
plea是什么意思/
(keywords being “Corporatewatch”, “Adidas”, “Cleanclothes” , “Standards of Engagement”, “academics studying” and “FDI”) But remember that the sites and others are not impartial and often prent a distorted picture. You must take care to think of both sides of the argument.
ANSWER: The issue is whether standards should be absolute (propor) or relative (opposing view). Perhaps there should be minimum standards to be obrved in all areas and then only relative standards. As well as thinking about the effect in the developing country, consider the effect in the developed country. If goods have to be t at prices that do not include payment of taxes and social
curity payments, how are developed countries going to fund pensions etc. Or should developed countries be specialixing in more advanced products and rvices.
Answers to End of Chapter Questions
1. Motives for FDI.Describe some potential benefits to an MNC as a result of direct foreign
investment (FDI). Elaborate on each type of benefit. Which motives for FDI do you think encourage
d Nike to expand its footwear production in Latin America?
ANSWER: See the text exhibit in this chapter for a complete summary of the potential benefits.
Regarding Nike’s motives, Latin America offers additional sources of demand, as Latin American consumers have shown an interest in Nike footwear (this is partially due to incread marketing targeted to Latin American markets). Second, Nike may be able to produce their athletic footwear at relatively low costs in some Latin American countries, as the production is labor-intensive and wages are low. Third, Nike may benefit from economies of scale by producing a large amount and exporting the additional shoes for sale to nearby countries. Fourth, the expansion into Latin America allows Nike to further diversify its business internationally.
2.Impact of a Weak Currency on Feasibility of FDI. Tilda AB, a Swedish producer of computer
disks, plans to establish a subsidiary in the Ukraine in order to penetrate the Middle Eastern market. Tilda’s executives believe that the Ukrainian Hryvnia’s value is relatively strong and will weaken against the Swedish Krone over time. If their expectations about the Hryvnia’s value are correct, how will this affect the feasibility of the project? Explain.
ANSWER: If the Hryvnia’s value is relatively strong now, Tilda will incur high costs of establishing a Mexican subsidiary. In addition, if the Hryvnia weakens, future remitted earnings by the subsidiary to the parent will be converted to fewer Krone. Tilda will be adverly affected by the exchange rate movements (although the project may still be feasible).
3.FDI to Achieve Economies of Scale. Max AG. and Marie AG are German automobile
manufacturers that desire to benefit from economies of scale. Max has decided to establish distributorship subsidiaries in various countries, while Marie has decided to establish manufacturing subsidiaries in various countries. Which firm is more likely to benefit from economies of scale?
ANSWER: Max is likely to benefit becau it is maintaining all of its manufacturing in one area.
If Marie spreads its production facilities, it will incur higher fixed costs of machinery.
4. FDI to Reduce Cash Flow Volatility. Rideau Chemical SA and Robert Sarl (both French
companies) have similar intentions to reduce the volatility of their cash flows. Rideau implemented a long-range plan to establish 40 percent of its business in Canada. Robert implemented a long-range plan to establish 30 percent of its business in Europe and Asia, scattered among 12 different countri
es. Which company will more effectively reduce cash flow volatility once the plans are achieved?
ANSWER: Robert would likely be more effective becau its international business is spread across veral major countries, while Rideau Chemical Company is concentrated in only one foreign country who business cycles are possibly more related to Europe.
5. Impact of Import Restrictions. If the United Kingdom impod long-term restrictions on
imports, would the amount of FDI by non-UK MNCs in the United Kingdom increa, decrea, or be unchanged? Explain.
ANSWER: It would likely increa becau the foreign firms would need to replace their exporting business with FDI in order to maintain their business in the UK. This is in effect what the EU has done in tting local content requirements to avoid tariffs.
breakingnews6. Capitalizing on Low-Cost Labor. Some MNCs establish a manufacturing facility where there is
a relatively low cost of labor. Yet, they sometimes clo the facility later becau the cost
advantage dissipates. Why do you think the relative cost advantage of the countries is reduced over time? (Ignore possible exchange rate effects.)
ANSWER: As MNCs capitalize on low cost labor, they may create a strong demand for labor, which can cau labor shortages and incread wage rates, thereby reducing any cost advantage. 7.Opportunities in Less Developed Countries. Offer your opinion on why economies of some less
developed countries with strict restrictions on international trade and FDI are somewhat independent from economies of other countries. Why would MNCs desire to enter such countries? If the countries relaxed their restrictions, would their economies continue to be independent of other economies? Explain.
ANSWER: Countries that are unrelated to other economies are desirable becau business in the countries would not be subject to existing business cycles in other countries. Conquently, an MNC’s overall cash flow may be more stable. However, a typical reason why the countries’ economies are independent of other economies is government restrictions on international trade and FDI. Thus, their economies are insulated from other countries. Yet, this means that while the countries may be desirable to MNCs, they may also be off limits to MNCs. If the governments of the countries loon restrictions, the MNCs could enter the countries, but the economies of the countries could no longer be as insulated from the rest of the world.
8.Consider the effects on FDI of a major political incident involving the host country of the MNC
making the investment.
ANSWER: Real investment abroad may be put at risk as the MNC could be en as a potential terrorist target. There may be expens associated with curity to ensure the safety of the employees. The cost of insuring the plant would also be higher.
9.FDI Strategy. Luigi SpA (an Italian company) has decided to establish a subsidiary in Taiwan
that will produce stereos and ll them there. It expects that its cost of producing the stereos will be one-third the cost of producing them in the Italy. Assuming that its production cost estimates are accurate, is Luigi’s strategy nsible? Explain.
ANSWER: No. Luigi recognized an advantage of producing stereos in Taiwan versus the euro zone. Yet, this is only an advantage if Luigi lls the stereos produced in Taiwan to the euro zone market. All of Luigi’s competition in the Taiwan market will have the same production costs as Luigi’s Taiwan subsidiary, so Luigi would not have an advantage in the Taiwan market.
10. Risk Resulting from International Business. This chapter concentrates on possible benefits
to a firm that increas its international business.
江门学校a. What are some risks of international business that may not exist for local business?
b. What does this chapter reveal about the relationship between an MNC’s degree of international
business and its risk?
ANSWER:
a. Some of the more common risks of FDI are a government takeover and changing tax laws. There
are additional risks (discusd in other chapters) such as currency restrictions, high probability of war, and declining economic conditions.
b. Firms with more international business can reduce risk with diversification. Thus, firms could
reduce their risk by increasing their degree of international business. However, there are some exceptions. A firm that pursues substantial international business in one country may increa its risk, especially if it does not fully understand the consumers and government laws in that country.
In general, a firm becomes expod to some types of risk that may not have existed before it pursued international business, but the diversification benefits may offt the types of risk.
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11.Motives for FDI. Starter ltd (UK) produces sportswear that is licend by professional sports
teams. It recently decided to expand in Europe. What are the potential benefits for this firm from using FDI?
cashbackANSWER: The primary reason would be to attract new sources of demand. This type of sportswear is much more popular in the UK, but the UK market is possibly saturated. The European market offers new sources of demand becau European people have not been expod to this type of sportswear.
12.Disney’s FDI Motives. What potential benefits do you think were most important in the decision
of the Walt Disney Co. to build a theme park in France?
ANSWER: There is no simple answer to this question, but the question usually leads to an interesting discussion. Some of the more likely motives as related to tho discusd in this chapter are:
a. New sources of demand—another theme park in the U.S. would have less potential, since U.S.
tourists are willing to travel to California or Florida to e the theme parks.winos
b. Economies of scale should result from the new theme park, becau much of the costs
associated with planning a theme park have already been incurred. Also, the sales of Disney toys will increa, allowing for additional economies of scale in production.
c. French labor may not necessarily be less costly than U.S. labor, but there may be a cost
advantage to the land in France (due to land subsidies provided by the French government).
d. Exploit monopolistic advantages—there are other theme parks in Europ
e. Yet, some tourists
may feel that no other theme park is an adequate substitute for Disney. Thus, Disney can now attract tourists who are unwilling to travel to the U.S.
e. Diversification—the Disney theme parks in the U.S. have experienced reduced sales when the
dollar is strong becau foreign tourism in the U.S. declines. A theme park in France may appeal to tourists who decide not to travel to the U.S. when the dollar is strong (euro is weak).
In fact, it may even attract more tourists from the U.S. when the dollar is strong.
13.FDI Strategy. Once an MNC establishes a subsidiary, FDI remains an ongoing decision. What
does this statement mean?
ANSWER: The subsidiary established due to FDI will generate earnings that are to be either reinvested in the host country or remitted to the parent. This reflects a continuous FDI decision of whether to expand in the host country.
14.Host Government Incentives for FDI. Why would foreign governments provide MNCs with
incentives to undertake FDI there?
ANSWER: Foreign governments sometimes expect that FDI will provide needed employment or technology for a country. For the reasons, they may provide incentives to encourage FDI. Advanced Questions
迈克尔杰克逊you are not alone15.FDI Strategy. J.C. Penney has recognized numerous opportunities to expand in foreign countries
and has assd many foreign markets, including Brazil, Greece, Mexico, Portugal, Singapore, and Thailand. It has opened new stores in Europe, Asia, and Latin America. In each ca, the firm was aware that it did not have sufficient understanding of the culture of each country that it had targeted. Conquently, it engaged in joint ventures with local partners who knew the preference of the local customers.
a. What comparative advantage does J.C. Penney have when establishing a store in a foreign country,
relative to an independent variety store?
b. Why might the overall risk of J.C. Penney decrea or increa as a result of its recent global
expansion?
c. J.C. Penney has been more cautious about entering China. Explain the potential obstacles associated
with entering China.
a.J.C. Penney has name recognition, which could result in customer trust, and therefore a
stronger demand for its products. It also has marketing experti that it applies to each store. It also has economies of scale, becau it could buy its products in bulk and distribute the products to the stores that need tho products.
b. Its risk may decrea becau it has a strategy that allows it to utilize its experti, while
relying on foreign experti for part of the business that requires knowledge about foreign cultures. Also, it has created more international diversification by spreading its store throughout more foreign markets, so that its overall performance is not as heavily influenced by U.S.
economic conditions.
Its risk could have incread if it lected local partners in the foreign countries that do not properly apply their knowledge of the local culture when making decisions about the types of products that the store should carry.
c.
Obstacles include high inflation in China, difficulties in converting foreign currency, difficulties in efficiently distributing products across stores, and the lack of disposable income for many China resi
dents.
