《国际财务管理》（英文版） Chap15 Foreign Direct Investment

Chapter Fifteen Foreign direct Investment 15 Chapter objective This chapter discusses various issues associated with foreign direct investments by MNCs, which play a key role in shaping the nature of the emerging global economy

INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Second Edition 15 Chapter Fifteen Foreign Direct Investment Chapter Objective: This chapter discusses various issues associated with foreign direct investments by MNCs, which play a key role in shaping the nature of the emerging global economy

Chapter outline ● Global trends in fdi o Why Do Firms Invest Overseas o Cross-Border Acquisitions o Political risk and fdi McGraw-Hilylrwoin 15-1 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 15-1 Chapter Outline ⚫ Global Trends in FDI ⚫ Why Do Firms Invest Overseas? ⚫ Cross-Border Acquisitions ⚫ Political Risk and FDI

Global Trends in FDi o Foreign direct Investment often involves the establishment of production facilities abroad Greenfield Investment Involves building new facilities from the ground up e Cross-Border Acquisition a Involves the purchase of existing business McGraw-Hilylrwoin 15-2 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 15-2 Global Trends in FDI ⚫ Foreign Direct Investment often involves the establishment of production facilities abroad. ⚫ Greenfield Investment ◼ Involves building new facilities from the ground up. ⚫ Cross-Border Acquisition ◼ Involves the purchase of existing business

Global Trends in FDi e Several developed nations are the sources of fDI outlowS about 90% of total world-wide fdi comes from the developed world o Both developing and developed nations are the recipient of inflows of FDI McGraw-Hilylrwoin 15-3 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 15-3 Global Trends in FDI ⚫ Several developed nations are the sources of FDI outflows. ◼ About 90% of total world-wide FDI comes from the developed world. ⚫ Both developing and developed nations are the recipient of inflows of FDI

Average Annual FDI (in Billions) 120 100 口 Inflows 60 口 Outflows 0 ntdindmmn McGraw-Hilylrwoin 1544 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 15-4 Average Annual FDI (in Billions) 0 20 40 60 80 100 120 Australia Canada China France Germany Italy Japan Mexico Netherlands Spain Sweden Switzerland United Kingdom United States Inflows Outflows

Why do Firms Invest Overseas? ● Trade barriers o Labour market Imperfections Intangible Assets o Vertical Integration ● Product Life Cycle . Shareholder diversification McGraw-Hilylrwoin 15-5 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 15-5 Why Do Firms Invest Overseas? ⚫ Trade Barriers ⚫ Labour Market Imperfections ⚫ Intangible Assets ⚫ Vertical Integration ⚫ Product Life Cycle ⚫ Shareholder Diversification

Trade barriers o Government action leads to market imperfections Tariffs, quotas, and other restrictions on the free flow of goods, services and people Trade Barriers can also arise naturally due to high transportation costs, particularly for low value-to weight goods McGraw-Hilylrwoin 15-6 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 15-6 Trade Barriers ⚫ Government action leads to market imperfections. ⚫ Tariffs, quotas, and other restrictions on the free flow of goods, services and people. ⚫ Trade Barriers can also arise naturally due to high transportation costs, particularly for low value-to￾weight goods

Labour market Imperfections o among all factor markets the labor market is the least perfect Recall that the factors of production are land, labor, capital, and entrepreneurial ability o If there exist restrictions on the flow of workers across borders. then labor services can be underpriced relative to productIvity The restrictions may be immigration barriers or simply Social preferences McGraw-Hilylrwoin 15-7 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 15-7 Labour Market Imperfections ⚫ Among all factor markets, the labor market is the least perfect. ◼ Recall that the factors of production are land, labor, capital, and entrepreneurial ability. ⚫ If there exist restrictions on the flow of workers across borders, then labor services can be underpriced relative to productivity. ◼ The restrictions may be immigration barriers or simply social preferences

Labour market Imperfections Persistent wage differentials across Country Hourly Cost countries exist. this germany $27.37 is one on the main Japan $21.38 reasons MNCs are frances $17.10 making substantial Israel $9.06 FDIs in less Taiwan $547 developed nations Mexico $257 McGraw-Hilylrwoin 15-8 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 15-8 Labour Market Imperfections Country Hourly Cost Germany $27.37 Japan $21.38 France/U.S. $17.10 Israel $9.06 Taiwan $5.47 Mexico $2.57 Persistent wage differentials across countries exist. This is one on the main reasons MNCs are making substantial FDIs in less developed nations

Intangible Assets Coca-Cola has a very valuable asset in its closely guarded secret formula? To protect that proprietary information, Coca-Cola has chosen fdi over licensing Since intangible assets are difficult to package and sell to foreigners MNcs often enjoy a comparative advantage with Fdi McGraw-Hilylrwoin 15-9 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 15-9 Intangible Assets ⚫ Coca-Cola has a very valuable asset in its closely guarded “secret formula”. ⚫ To protect that proprietary information, Coca-Cola has chosen FDI over licensing. ⚫ Since intangible assets are difficult to package and sell to foreigners, MNCs often enjoy a comparative advantage with FDI