Week7 CaseStudy
notes
1. Write a 1 page summary of IPPT chapters 8 and 9
2. Case study 1 page
3. Find the reply question in the case study
Week 7 Case Study: IMF Podcast Reflection
Review ANY of the podcasts created by the IMF by clicking on the link below.
https://www.imf.org/en/News/Podcasts?page=1 (Links to an external site.)
Pick a topic of interest. There are over 80 selections to choose from. Indicate the title of the Podcast. Create a one-page summary/reflection of the contents of the Podcast in a word document (1 page, double-spaced, 12 pt font).
These are very relevant and interesting videos, review a couple and choose the one for you. I look forward to your reflection
Rubric
Week 7 Case Study: IMF Podcast Reflection
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Criteria |
Ratings |
Pts |
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This criterion is linked to a Learning Outcome Podcast Summary The student clearly summarizes / briefs the audience on the IMF podcast. |
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10 pts |
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This criterion is linked to a Learning Outcome Reflection and the relation of Podcasts to International Business The student addresses how the podcast is related to themes in International Business and provides her/his reflection. |
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30 pts |
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Total Points: 40 |
Q.2 Write a reply/suggestion for this article
MNC – TSMC
TSMC outsources work to OSAT.
TSMC outsources some of the processes of its CoWoS packaging business to OSAT, products in small batch customization products. Some high-performance chips require small-batch production. However, TSMC is more specialized in handling the process at the wafer level. Processing small batch production is less automated and requires more manpower in TSMC'S plants. OSAT has more experience and is more specialized in handling small-batch customization products. By outsourcing this part of the work to OSAT, TSMC would be more productive and could focus on the core function of its business.
Shanghai Metals Market. (2021, November 25). New cooperation model? TSMC outsourced part of the CoWoS process to OSAT. Retrieved October 11, 2022, from https://news.metal.com/newscontent/101677124/new-cooperation-model-tsmc-outsourced-part-of-the-cowos-process-to-osat
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©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Chapter 8
Foreign Direct Investment
*
©McGraw-Hill Education.
What Is FDI? (1 of 2)
- Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country
- the firm becomes a multinational enterprise
- FDI can be in the form of
- greenfield investments – the establishment of a wholly new operation in a foreign country
- acquisitions or mergers with existing firms in the foreign country
*
Greenfield operation:
- mostly in developing nations
Mergers and acquisitions:
- quicker to execute
- foreign firms have valuable strategic assets
- believe they can increase the efficiency of the acquired firm
- more prevalent in developed nations
The Opening Case: Volkswagen in Russia describes Volkswagen’s greenfield investment in Russia and the effect of changing oil prices on its profitability.
©McGraw-Hill Education.
What Is FDI? (2 of 2)
- The flow of FDI – the amount of FDI undertaken over a given time period
- Outflows of FDI are the flows of FDI out of a country
- Inflows of FDI are the flows of FDI into a country
- The stock of FDI – the total accumulated value of foreign-owned assets at a given time
*
LO 8-1: Recognize current trends regarding foreign direct investment (FDI) in the world economy.
©McGraw-Hill Education.
What Are The Patterns Of FDI? (1 of 5)
Both the flow and stock of FDI have increased over the last 35 years
- Most FDI is still targeted towards developed nations
- United States, Japan, and the EU
- but, other destinations are emerging
- South, East, and South East Asia especially China
- Latin America
*
Country Focus: Foreign Direct Investment in China explores investment opportunities in China. In the late 1970s, China opened its doors to foreign investors. By the mid 2000s, China attracted $60 billion of FDI annually. China’s large population is a magnet for many companies and because high tariffs make it difficult to export to the Chinese market, firms frequently turn to foreign direct investment. However, many companies have found it difficult to conduct business in China, and in recent years investment rates have slowed. In response, the Chinese government, hoping to continue to attract foreign companies has established a number of incentives for would-be investors.
©McGraw-Hill Education.
What Are The Patterns Of FDI? (2 of 5)
FDI Outflows 1982-2012 ($ billions)
*
Source: UNCTAD statistical data set, http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx
©McGraw-Hill Education.
What Are The Patterns Of FDI? (3 of 5)
FDI Inflows by Region 1995-2013 ($ billion)
*
Source: Calculated by the author from United Nations World Investment Report, various editions.
©McGraw-Hill Education.
What Are The Patterns Of FDI? (4 of 5)
The growth of FDI is a result of
a fear of protectionism
- want to circumvent trade barriers
political and economic changes
- deregulation, privatization, fewer restrictions on FDI
new bilateral investment treaties
- designed to facilitate investment
the globalization of the world economy
- many companies now view the world as their market
- need to be closer to their customers
*
©McGraw-Hill Education.
What Are The Patterns Of FDI? (5 of 5)
- Gross fixed capital formation – the total amount of capital invested in factories, stores, office buildings, and the like
- the greater the capital investment in an economy, the more favorable its future prospects are likely to be
- So, FDI is an important source of capital investment and a determinant of the future growth rate of an economy
*
©McGraw-Hill Education.
What Is The Source Of FDI? (1 of 2)
- Since World War II, the U.S. has been the largest source country for FDI
- the United Kingdom, the Netherlands, France, Germany, and Japan are other important source countries
- together, these countries account for 60% of all FDI outflows from 1998-2011
*
©McGraw-Hill Education.
What Is The Source Of FDI? (2 of 2)
Cumulative FDI outflows, 1998–2012 ($ billions)
*
Source: Calculated by the author from United Nations World Investment Report, various editions.
©McGraw-Hill Education.
Why Do Firms Choose Acquisition Versus Greenfield Investments? (1 of 2)
Most cross-border investment is in the form of mergers and acquisitions rather than greenfield investments
- between 40-80% of all FDI inflows per annum from 1998 to 2011 were in the form of mergers and acquisitions
- but in developing countries two-thirds of FDI is greenfield investment
fewer target companies
*
©McGraw-Hill Education.
Why Do Firms Choose Acquisition Versus Greenfield Investments? (2 of 2
Firms prefer to acquire existing assets because
- mergers and acquisitions are quicker to execute than greenfield investments
- it is easier and perhaps less risky for a firm to acquire desired assets than build them from the ground up
- firms believe that they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills
*
©McGraw-Hill Education.
Why Choose FDI? (1 of 2)
Question: Why does FDI occur instead of exporting or licensing?
Exporting – producing goods at home and then shipping them to the receiving country for sale
exports can be limited by transportation costs and trade barriers
FDI may be a response to actual or threatened trade barriers such as import tariffs or quotas
*
LO 8-2: Explain the different theories of FDI.
Why do firms invest rather than use exporting or licensing to enter foreign markets?
FDI is more attractive when transportation costs or trade barriers make exporting unattractive.
Management Focus: Foreign Direct Investment by Cemex explores why foreign direct investment made more sense for the Mexican cement maker than exporting. For Cemex, exporting is too costly.
©McGraw-Hill Education.
Why Choose FDI? (2 of 2)
Licensing – granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit that the foreign entity sells
Internalization theory (aka market imperfections theory) – compared to FDI licensing is less attractive
firm could give away valuable technological know-how to a potential foreign competitor
does not give a firm the control over manufacturing, marketing, and strategy in the foreign country
the firm’s competitive advantage may be based on its management, marketing, and manufacturing capabilities
*
A firm will favor FDI over licensing when it wishes to maintain control over its technological know-how, or over its operations and business strategy, or when the firm’s capabilities are simply not amenable to licensing.
©McGraw-Hill Education.
8-16
Foreign direct investment (FDI) in a developing economy, such as Russia or the countries of sub-Saharan Africa, can be extremely profitable for multinational enterprises. It can also result in substantial losses if economic conditions in the host country deteriorate.
If you were the head of a major manufacturer of household goods seeking entry into the market of a country experiencing strong economic growth due to its oil and gas exports, which entry strategy would you pursue: exporting, licensing, or foreign direct investment? If FDI, would you seek to acquire an existing firm, or build entirely new facilities (a greenfield investment)?
*
©McGraw-Hill Education.
What Is The Pattern Of FDI? (1 of 2)
Question: Why do firms in the same industry undertake FDI at about the same time and the same locations?
Knickerbocker – FDI flows are a reflection of strategic rivalry between firms in the global marketplace
- multipoint competition – when two or more enterprises encounter each other in different regional markets, national markets, or industries
*
With regard to horizontal FDI, market imperfections arise in two circumstances:
- when there are impediments to the free flow of products between nations which decrease the profitability of exporting relative to FDI and licensing
- when there are impediments to the sale of know-how which increase the profitability of FDI relative to licensing
©McGraw-Hill Education.
What Is The Pattern Of FDI? (2 of 2)
Question: Why is it profitable for firms to undertake FDI rather than continuing to export from a home base, or licensing a foreign firm?
Dunning’s eclectic paradigm – it is important to consider
- location-specific advantages – that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets
- externalities – knowledge spillovers that occur when companies in the same industry locate in the same area
*
FDI is expensive because a firm must bear the costs of establishing production facilities in a foreign country or of acquiring a foreign enterprise.
FDI is risky because of the problems associated with doing business in another culture where the rules of the game may be different.
©McGraw-Hill Education.
What Are The Theoretical Approaches To FDI? (1 of 2)
- The radical view – the multinational enterprise (MNE) is an instrument of imperialist domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries
- in retreat almost everywhere
- The free market view – international production should be distributed among countries according to the theory of comparative advantage
- embraced by advanced and developing nations including the United States and Britain, but no country has adopted it in its purest form
*
LO 8-3: Understand how political ideology shapes a government’s attitudes towards FDI.
The radical view lacked support by the end of the 1980s because of:
- the collapse of communism in Eastern Europe
- the poor economic performance of those countries that followed the policy
- a growing belief by many of these countries that FDI can be an important source of technology and jobs and can stimulate economic growth
- the strong economic performance of developing countries that embraced capitalism rather than ideology
©McGraw-Hill Education.
What Are The Theoretical Approaches To FDI? (2 of 2)
- Pragmatic nationalism – FDI has both benefits (inflows of capital, technology, skills, and jobs) and costs (repatriation of profits to the home country and a negative balance of payments effect)
- FDI should be allowed only if the benefits outweigh the costs
- Recently, there has been a strong shift toward the free market stance creating
- a surge in FDI worldwide
- an increase in the volume of FDI in countries with newly liberalized regimes
*
Management Focus: DP World and the United States explores the reaction to the bid by DP World, a Dubai-based ports operator, to acquire P&O, a British firm that runs a network of global marine terminals. An acquisition of P&O would give DP World management of six U.S. ports. While the Bush administration claimed the acquisition posed no threat to national security, several prominent U.S. Senators raised concerns about the acquisition. Ultimately, DP World pulled out of the deal, but stated that it would look for alternative ways to enter the U.S. market.
©McGraw-Hill Education.
How Does FDI Benefit
The Host Country? (1 of 2)
There are four main benefits of inward FDI for a host country
Resource transfer effects – FDI brings capital, technology, and management resources
Employment effects – FDI can bring jobs
*
LO 8-4: Describe the benefits and costs of FDI to home and host countries.
©McGraw-Hill Education.
How Does FDI Benefit
The Host Country? (2 of 2)
Balance of payments effects – FD
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