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Australia (1,845)
Management (15)
MGC2120 (6)
Lecture

OneClass International Business – Foreign Direct Investment and the Multinational Enterprise.pdf

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Department
Management
Course
MGC2120
Professor
Dr Lakmal Abeysekera
Semester
Spring

Description
International  Business  –  Foreign  Direct  Investment  and  the   Multinational  Enterprise   What  is  FDI?   -­‐ Stands  for  Foreign  Direct  Investment,  occurs  when  a  firm  directly  invests  in   facilities  to  produce  or  market  a  product  in  a  foreign  country.     -­‐ Subsidiaries  are  created  in  different  countries  where  the  foreign   headquarters  have  significant  control  of  its  operations;  and  it  can  affect  the   managerial  decisions  of  the  foreign  operation.     -­‐ However,  operating  in  different  countries  can  cause  conflict  to  arise.     Forms  of  FDI   -­‐ Horizontal  Direct  Investment:  invest  overseas  Eg:  Toyota  Australia   -­‐ It  is  similar  to  put  all  your  eggs  into  one  basket  and  do  the  same  thing  you  do   at  your  home  country  =>  might  be  affect  by  the  global  economy.     -­‐ Vertical  Direct  Investment  (backward):  invest  in  a  country  that  provides   supplies  for  that  company  Eg:  Toyota  invests  in  a  company  that  provides   cheaper  assets  for  their  manufacturing.  An  interest  industry  is  mining.     -­‐ Forward:  invest  in  a  country  that  represent  a  sales/distribution  of  that   country.  Eg:  Toyota  opens  a  sale  branch  and  sell  cars  through  that  channel.     -­‐ Greenfield  Investment:  considered  to  be  the  most  common,  no  existing   partner,  joint  venture,  better  for  the  business  to  have  competitive  advantage   to  be  successful.  Firms  might  have  to  work  on  individual  assignment  but   there  are  hardly  any  problems  in  terms  of  coordination  problems.  Eg:  100%   control  of  your  work  if  you  operate  by  yourself.     -­‐ Mergers  and  acquisition:  form  a  partnership/buy  a  company  in  a  foreign   country.  Developed  nations:  find  more  suitable  partners,  support  network,   resources  already  established.  Don’t  have  to  invest  much,  don’t  have  to  build   anything  from  scratch.  Share  responsibility.     Alternatives  to  FDI :  due  to  transportation  costs,  trade  barriers.  When  do   business  in  one  country,  you  are  under  control  of  that  country’s  government.     a) Exporting   b) Licensing:  Internationalization  Theory  (Market  Imperfections  Theory)  create   limitations   -­‐ you  have  to  tell  the  licensee  what  to  do,  give  away  your  IP  =>  end  up  being   competitors  in  long  term   -­‐ do  not  allow  firm  over  control  the  process,  different  levels  of  control   required   -­‐ difficult  to  teach  or  to  hand  over  to  other  countries,  the  capabilities  that   made  you  successful  in  the  first  place.     Trends  in  FDI   -­‐ Follows  a  trend  that  has  increased  in  the  last  30  years.  Due  to  various   reasons  such  as  protectionist  pressures,  liberalisation  of  the  world  economy,   global  strategies.  Bear  in  mind  that  there  are  some  bodies  that  can  affect  the   government’s  decisions  on  trade  barriers,  and  there  are  hardly  any   businesses  that  only  consider  doing  business  in  their  home  countries.     Directions  of  FDI   -­‐ Usually  comes  from  developed  countries  because  they  have  the  resources   (capital  mainly)  to  invest  in  another  country.     -­‐ It  is  easier  to  go  and  invest  in  a  similar  market  to  the  home  country   -­‐ Eg:  the  US  is  considered  to  be  the  largest  market  for  FDI  because  it  has  the   largest  population  and  it  is  a  wealthy  nation  (willing  to  spend  on  your   product),  dynamic  economy.  Hence,  government  encourages  FDI.     -­‐ Recently,  there  is  north-­‐south  FDI  (developed  to  developing)  Eg:  China  is  in   target   FDI  in  the  Service  sector   -­‐ It  is  difficult  to  export  service.  However,  government  start    realizing  the   benefits  of  service.     -­‐ Thanks  to  the  invention  of  the  Internet  Eg:  skype,  teleconferencing   -­‐ It  is  easier  for  the  home  country  to  communicate  with  foreign  entities   -­‐ Service  is  location-­‐bound:  they  have  to  be  produced  where  they  are   consumed.   -­‐ Sources  of  FDI  generate  more  in  developed  countries.     -­‐  FDI  reflects  strategic  rivalry,  if  one  key  player  expands  through  FDI,  direct   competitors  realise  that  they  need  tomove  as  well  and  not  giving  the  advantages  like   before  =>  the  need  to  compete,  the  marketing  advantage   eg:  toyota  and  nissan  follow  honda.  honda  is  the  1st  company  to  undertake  FDI.  key   competitors  like  toyota  and  nissan  also  get  on;  they  dont  want  honda  to  get  the   advantage.  firms  follow  their  competitors  through  FDI   -­‐  eg:  film  industry:  Kodak  decided  to  invest  into  new  industry,  multipoint  is  where   competitors  enter  different  industries  just  to  make  sure  that  the  competitors  dont   gain  the  advantages   -­‐  PLC:  number  of  stages  in  terms  of  global  expansion,  firms  are  expected  to  go   through  these  stages   -­‐  John  Dunning  (eclectic  paradigm):  what  he  thought  the  incentives  to  go  FDI   a)  ownership  advantage:  source  of  competitive  advantage   b)  internalisation:  maintain  control  of  your  resources  and  assets   c)  location:  advantage
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