Foreign Direct Investment

Opening case-Starbucks

Starbucks strategy

Coffee house setting, blended coffees

Attention to hiring, training, and compensation Motivation of employees Some Go Well

Superior customer service

Used nation-specific strategies (growth strategies)

Japan License Transferred Employees 2003: 310 stores Thailand

Some Go Bad

What is foreign direct investment

Company acquiring or merging with a firm in a different country A firm creating a Greenfield operation in a different country A firm creating a subsidiary in a different country As a result

The firm has significant control of its foreign operation Firm can affect managerial decisions of the foreign operation

FDI - Flow versus stock

FDI occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country

Flow: Amount of FDI over a period of time (one year) Stock: Total accumulated value of foreign owned assets at a given point in time

FDI is not the investment by individuals, firms or public bodies in foreign financial instruments

Why is FDI important ?

Answers How We Go In Firms want a presence in foreign markets Firms want control over growth of these foreign markets

To gain first mover advantages To ward off competitors To determine locations, advertising and other related strategic decisions in the firms interest

Trends in FDI

Flow and stock increased in the last 20 years In spite of decline of trade barriers, FDI has grown more rapidly than world trade because

Businesses fear protectionist pressures FDI is seen as a way of circumventing trade barriers Dramatic political and economic changes in many parts of the world Globalization of the world economy has raised the vision of firms who now see the entire world as their market

Forms Of FDI: Greenfield vs. Acquisitions

Green field operation:

Mergers and acquisitions:

Mostly in developing nations

Preferred Method (70%80%) Quicker to execute. Foreign firms have valuable strategic assets Believe they can increase the efficiency of the acquired firm
Enhance EPS

More prevalent in developed nations

Forms of FDI

Horizontal Direct Investment

FDI in the same industry abroad as company operates at home.

Why FDI over exporting and licensing

H - FDI when and why?

Transportation costs are high

Low Value to Weight Ratio

Cement, Coke, etc Look at component that Transportation is of total landed costs

Market Imperfections (Internalization Theory)

Impediments to the free flow of products between nations Impediments to the sale of know-how (licence)

Follow the lead of a competitor - strategic rivalry Location specific advantages (natural resources)

Oil, gas, labour

Vertical FDI

Vertical FDI Two Types

Backward - investments into industry that provides inputs into a firms domestic production (typically extractive industries) Forward - investment in an industry that utilizes the outputs from a firms domestic production (typically sales and distribution)

V- FDI Why

Strategic Behaviour

By vertically integrating, you can shut out new competitors out of an industry

Husky Oil, etc, Alcoa & Alcan

VW

Create entrance into a market

Other Impediments

Impediments to the sale of know-how

Risk giving away know-how to competitors Impediments to the sale of know how Licensing implies low control over foreign entity Know-how not amenable to licensing

Decision framework
How high are transportation costs and tariffs?

Low No

Export

High
Is know-how amenable to licensing?

Horizontal FDI Yes

Yes
Is tight control over foreign operation required?

Horizontal FDI

No
Can know-how be protected by licensing contract?

No

Horizontal FDI

Yes
Then license