The Topic Discussion Notes provide you with a brief summary of the essential concepts to master in each Topic and the major Learning Outcomes. Specifically, each of thekey concepts in the relevant chapters for each Topic are summarised briefly. In addition, there are brief summaries of each slide related to the Course Slides for each chapter. You will find that the summaries for each slide provide you with an essential background of knowledge, ideally after you have read each chapter. In this way it enables you to test your knowledge, as well as laying a foundation to build on and deepen your knowledge of international businessby reading many of the of the Course Journal Articles. While they are optional reading, reading the Course Journal Articles will assist you to have a much broader, more contemporary and practical knowledge base from which to apply your knowledge now and in the future. Note that the Course Slides are located on the Learnonline site and the Journal Articles are available through the e-Library Resources for this Course. Chapter 8: Foreign Direct Investment Learning objectives The focus of this chapter is foreign direct investment (FDI). The growth of foreign direct investment in the last 25 years has been phenomenal. FDI can take the form of a foreign firm buying a firm in a different country, or deciding to invest in a different country by building operations there. With FDI, a firm has a significant ownership in a foreign operation and the potential to affect managerial decisions of the operation. The goal of our coverage of FDI is to understand the pattern of FDI that occurs between countries, and why firms undertake FDI and become multinational in their operations as well as why firms undertake FDI rather than simply exporting products or licensing their know-how. The opening case describes Volkswagen’s greenfield investment in Russia and the effect of changing oil prices on its profitability. The closing case explores the flow of FDI into Nigeria, particularly as the country began to transition toward a more stable, democratic form of government in the early twenty-first century. Today, Nigeria is one of the leading recipients of FDI in sub-Saharan Africa, although the country still faces a number of obstacles to economic development. LECTURE OUTLINE The PPT slides include additional notes that can be viewed by clicking on “view,” then on “notes.” The following provides a brief overview of each Power Point slide. Slides 8-2 and 8-3 What Is Foreign Direct Investment? Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country. Once a firm undertakes FDI it becomes a multinational enterprise. Another Perspective: Each year Fortune magazine publishes a list of the 500 largest global corporations in the world. Fortune calls its list the "Global 500." This list can be accessed at {http://fortune.com/global500/}. The article contains an excellent discussion of the role of global firms in the world economy. FDI can take the form of a greenfield investment, in which a wholly new operation is established in a foreign country, or it can take place via acquisitions or mergers with existing firms in the foreign country. Another Perspective: Another web site that provides an excellent discussion of the role of multinational corporations in the world economy is available at {http://www.oecdobserver.org/news/fullstory.php/aid/446/The_trust_business.html}. The flow of FDI refers to the amount of FDI undertaken over a given time period, while the stock of FDI refers to the total accumulated value of foreign-owned assets at a given time. Outflows of FDI are the flows of FDI out of a country, and inflows of FDI are the flows of FDI into a country. Slides 8-4 through 8-8 Trends in FDI There has been a marked increase in both the flow and stock of FDI in the world economy over the past 30 years. While the United States remains a top destination for FDI flows, South, East, and Southeast Asia, and particularly China, are now seeing an increase of FDI inflows, and Latin America is also emerging as an important region for FDI. Another Perspective: Tanzania has recently been named one of Africa’s top FDI hotspots. To learn more about this trend go to {http://www.dailynews.co.tz/index.php/local-news/17188-dar-named-among-africa-s-top-fdi-hotspots}. Slides 8-9 and 8-10 The Source of FDI 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. Slides 8-11 and 8-12 The Form of FDI: Acquisitions Versus Greenfield Investments Most cross-border investment is in the form of mergers and acquisitions rather than greenfield investments. Slides 8-13 and 8-14 Why Choose Foreign Direct Investment? Why do firms choose FDI instead of exporting or licensing? Internalization theory (also known as market imperfections theory) suggests that licensing has three major drawbacks. Slide 8-15 Think Like a Manager: Exporting, Licensing, or FDI? Slides 8-16 and 8-17 The Pattern of Foreign Direct Investment Knickerbocker looked at the relationship between FDI and rivalry in oligopolistic industries (industries composed of a limited number of large firms) and suggested that FDI flows are a reflection of strategic rivalry between firms in the global marketplace. According to the eclectic paradigm, in addition to the various factors discussed earlier, it is important to consider: Slides 8-18 and 8-19 Political Ideology and Foreign Direct Investment Ideology toward FDI ranges from a radical stance that is hostile to all FDI to the non-interventionist principle of free market economies. Between these two extremes is an approach that might be called pragmatic nationalism. The radical view argues that the MNE is an instrument of imperialist domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries. According to the free market view, international production should be distributed among countries according to the theory of comparative advantage. Pragmatic nationalism suggests that FDI has both benefits, such as inflows of capital, technology, skills and jobs, and costs, such as repatriation of profits to the home country and a negative balance of payments effect. Recently, there has been a strong shift toward the free market stance creating: Slides 8-20 and 8-21 Host Country Benefits of FDIIntroduction to Topic4 Discussion Notes
Government policy is often shaped by a consideration of the costs and benefits of FDI.
There are four main benefits of inward FDI for host countries: resource transfer effects; employment effects; balance of payments effects, and effects on competition and growth.
Slides 8-22 and 8-23 Host Country Costs
There are three mains costs from inward FDI for the host country: the possible adverse effects of FDI on competition within the host nation; adverse effects on the balance of payments; and the perceived loss of national sovereignty and autonomy.
Slide 8-24 Home Country Benefits
The benefits of FDI for the home country include: the effect on the capital account of the home country’s balance of payments from the inward flow of foreign earnings; the employment effects that arise from outward FDI; and the gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country.
Slides 8-25 and 8-26 Home Country Costs
The home country’s balance of payments can suffer from the initial capital outflow required to finance the FDI; if the purpose of the FDI is to serve the home market from a low cost labor location; and if the FDI is a substitute for direct exports.
International trade theory suggests that home country concerns about the negative economic effects of offshore production (FDI undertaken to serve the home market) may not be valid.
Slides 8-27 and 8-28 Government Policy Instruments and FDI
Home countries and host countries use various policies to regulate FDI.
Another Perspective: The World Bank offers information on the business environment in different countries. To explore the information, go to {http://www.worldbank.org/}, click on “countries”, and select the country in question.
Governments can both encourage and restrict FDI.
To encourage inward FDI, governments offer incentives to foreign firms to invest in their countries, while they restrict inward FDI through ownership restraints and performance requirements.
Slide 8-29 International Institutions and the Liberalization of FDI
The World Trade Organization is trying to establish a universal set of rules designed to promote the liberalization of FDI.
Slides 8-30 through 8-32 Implications for Managers
Managers need to consider what trade theory implies, and the link between government policy and FDI.
The direction of FDI can be explained through the location-specific advantages argument associated with John Dunning.
A host government’s attitude toward FDI is an important variable in decisions about where to locate foreign production facilities and where to make a foreign direct investment.
Chapter 9: Regional Economic Integration
Learning objectives
- Describe the different levels of regional economic integration.
- Understand the economic and political arguments for regional economic integration.
- Understand the economic and political arguments against regional economic integration.
- Explain the history, current scope, and future prospects of the world’s most important regional economic agreements.
- Understand the implications for business that are inherent in regional economic integration agreements.
This chapter discusses regional economic integration, agreements among countries within a geographic region to achieve economic gains from the free flow of trade and investment among themselves.
There are five levels of economic integration. In order of increasing integration, they include free trade area, customs union, common market, economic union, and full political union.
Integration is not easily achieved or sustained. Although integration brings benefits to the majority, it is never without costs for the minority. Concerns over sovereignty often slow or stop integration attempts.
The creation of single markets in the EU and North America means that many markets that were formerly protected from foreign competition are now more open. This creates major investment and export opportunities for firms within and outside these regions.
The free movement of goods across borders, the harmonization of product standards, and the simplification of tax regimes make it possible for firms based in a free trade area to realize potentially enormous cost economies by centralizing production in those locations within the area where the mix of factor costs and skills is optimal.
The opening case describes the growth of the Mexican auto industry due to a wave of foreign direct investment spurred by regional trade agreements, such as NAFTA. The closing case discusses the complicated case of Mexican tomato growers, U.S. tomato growers, and the pricing structure that was in place once NAFTA went into effect.
LECTURE OUTLINE
The PPT slides include additional notes that can be viewed by clicking on “view,” then on “notes.” The following provides a brief overview of each Power Point slide.
Slide 9-2 Introduction
Regional economic integration refers to agreements between countries in a geographic region to reduce tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other.
Despite the rapid spread of regional trade agreements designed to promote free trade, there are those who fear that the world is moving toward a situation in which a number of regional trade blocks compete against each other. In this scenario of the future, free trade will exist within each bloc, but each bloc will protect its market from outside competition with high tariffs.
Slides 9-3 through 9-6 Levels of Economic Integration
The five levels of economic integration are: free trade area, customs union, common market, economic union, and political union.
The most enduring free trade area in the world is the European Free Trade Association. EFTA currently joins four countries--Norway, Iceland, Liechtenstein, and Switzerland. Other free trade areas include the North American Free Trade Agreement (NAFTA).
Another Perspective: A site with information and additional links on NAFTA is available at {http://www.fas.usda.gov/itp/Policy/NAFTA/nafta.asp}. The site includes downloadable power point presentations on the benefits of NAFTA.
Another Perspective: To find out more about EFTA, go to {http://www.efta.int/}, and click on “EFTA AELE.” From here you can click on several icons to get quick facts, more in-depth reports, information on the European Economic Area, and many other issues related to EFTA.
Customs unions around the world include the current version of the Andean Pact (between Bolivia, Colombia, Ecuador, and Peru).
Currently, Mercosur, the South America grouping that includes Brazil, Argentina, Paraguay, and Uruguay, is aiming to eventually establish itself as a common market.
The European Union (EU) is an economic union, although an imperfect one since not all members of the EU have adopted the euro, the currency of the EU, and differences in tax rates across countries still remain.
Slide 9-7 The Economic and Political Case for Integration
Regional economic integration can be seen as an attempt to achieve additional gains from the free flow of trade and investment between countries beyond those attainable under international agreements such as the WTO.
The political case for integration has two main points: (1) by linking countries together, making them more dependent on each other, and forming a structure where they regularly have to interact, the likelihood of violent conflict and war will decrease, and (2) by linking countries together, they have greater clout and are politically much stronger in dealing with other nations.
Slide 9-8 Impediments to Integration
There are two main impediments to integration:
- although a nation as a whole may benefit significantly from a regional free trade agreement, certain groups may lose
- concerns over national sovereignty
Whether regional integration is in the economic interests of the participants depends upon the extent of trade creation as opposed to trade diversion. Trade creation occurs when low cost producers within the free trade area replace high cost domestic producers. Trade diversion occurs when higher cost suppliers within the free trade area replace lower cost external suppliers. A regional free trade agreement will only make the world better off if the amount of trade it creates exceeds the amount it diverts.
Slides 9-9 and 9-10 Regional Economic Integration in Europe
There are two trade blocks in Europe:
- the European Union (EU)
- the European Free Trade Association
The EU is by far the more significant, not just in terms of membership, but also in terms of economic and political influence in the world economy.
Slides 9-11 and 9-12 Evolution of the European Union
The EU is the product of two political factors:
- devastation of two world wars on Western Europe and the desire for a lasting peace
- European nations’ desire to hold their own on the world’s political and economic stage.
The forerunner of the EU was the European Coal and Steel Community, which had the goal of removing barriers to trade in coal, iron, steel, and scrap metal formed in 1951.
The EEC was formed in 1957 at the Treaty of Rome. While the original goal was for a common market, progress was generally very slow.
Another Perspective: The EU web site is {http://europa.eu/index_en.htm}. The site contains a broad array of information about the historical role and current activities of the EU in the global economy.
The Single European Act called for the removal of border controls, mutual recognition of standards, open public procurement, a barrier free financial services industry, no currency exchange controls, free and open freight transport, and freer and more open competition.
Slide 9-13 Political Structure of the European Union
The main institutions of the EU are:
- the European Council (ultimate controlling authority within the EU)
- the European Commission (responsible for implementing aspects of EU law and monitoring member states to ensure they are complying with EU laws)
- the European Parliament (debates legislation proposed by the commission and forwarded to it by the council)
- the Court of Justice (the supreme appeals court for EU law).
Slides 9-14 and 9-15 The Establishment of the Euro
The Treaty of Maastricht, signed in 1991, committed the EU to adopt a single currency, the euro, by January 1, 1999. The euro is used by 17 of the 27 member states.It was never adopted by Britain. More recently, with theBrexit vote (UK exit from the EU) in2016, the future for the EU seems uncertain.By adopting the euro, the EU has created the second largest currency zone in the world after that of the U.S. dollar.
Since its establishment January 1, 1999, the euro has had a volatile trading history with the U.S. dollar. Initially, the currency fell in value relative to the dollar, but has since strengthened.
Another Perspective: The European Union has a web page devoted to the euro {http://ec.europa.eu/economy_finance/euro/index_en.htm}. Students can explore the site and click on the pages to see pictures of the coins and notes, the advantages of participating in the euro zone, and frequently asked questions about the euro.
Another Perspective: The European Central Bank maintains a web site with current information on the euro. The site is available at {http://www.euro.ecb.int/}.
Another Perspective: At one point in time, joining the Euro Zone had been the goal of many Eastern European countries. Now however, given the recent financial crises that is threatening the future of the euro, many are rethinking their plans. To learn more, go to {http://www.businessweek.com/magazine/content/11_27/b4235017725502.htm}.
Slide 9-16 Enlargement of the European Union
Several countries, particularly from Eastern Europe, have applied for membership in the EU. In December of 2002, the EU formally agreed to accept the applications of 10 countries, and they joined on May 1, 2004. Today, membership is up to 28 countries, with Croatia joining in July of 2013. And of course more recent, the exit of the UK, known as Brexit!
Slides 9-17 and 9-18 Regional Economic Integration in the Americas
The North American Free Trade Agreement (NAFTA) is the most significant attempt at economic integration in the Americas. Other efforts include the Andean group and Mercosur. In addition, there are plans to establish a hemisphere wide Free Trade Area of the Americas (FTAA.)
Slides 9-19 through 9-22 The North American Free Trade Agreement
The free trade agreement between the United States, Canada, and Mexico became law January 1, 1994.
Another Perspective: More on NAFTA can be found at {http://www.fas.usda.gov/itp/Policy/NAFTA/nafta.asp}.
Following approval of NAFTA by the U.S. Congress a number of other Latin American countries indicated their desire to eventually join NAFTA. Currently the governments of both Canada and the U.S. are adopting a wait and see attitude with regard to most countries.
Another Perspective: Many organizations are anxious to take advantage of the opportunities offered by NAFTA. The NAFTA Register {http://www.naftaregister.com/}is a directory of export management companies, export service providers, and trading companies that want to profit from NAFTA by helping buyers and selling take advantage of NAFTA related opportunities.
Slide 9-23 Think Like a Manager: NAFTA
Slide 9-24 The Andean Community
The Andean Pact, originally formed in 1969, was based on the EU model, but was far less successful in achieving its stated goals. In 1990, the Andean Pact was re-launched, and now operates as a customs union.
Another Perspective: To see new developments with the Andean Community go to {http://www.comunidadandina.org/endex.htm}.
Slide 9-25 Mercosur
In some industries Mercosur is trade diverting rather than trade creating, and local firms are investing in industries that are not competitive on a worldwide basis.
Another Perspective: Mercosur's website, which includes a broad array of useful information, can be accessed at {http://www.sice.oas.org/trade/mrcsr/mrcsrtoc.asp}.
Slide 9-26 Central American Trade Agreement Market and CARICOM
There are two other trade pacts in the America, the Central American Trade Market and CARICOM, although neither has made much progress as yet.
Slide 9-27 Free Trade of the Americas
If the FTAA is established, it will have major implications for cross-border trade and investment flows within the hemisphere. The FTAA would create a free trade area of 850 million people.
Another Perspective: Additional information on the Free Trade of the Americas can be found at {http://www.ftaa-alca.org/alca_e.asp}.
Slide 9-28 Regional Economic Integration In Asia
Several efforts have been made to integrate in Asia
One of the most successful is the Association of Southeast Asian Nations (ASEAN)
Slides 9-29 and 9-30 Association of Southeast Asian Nations
Formed in 1967, ASEAN currently includes Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and, most recently, Vietnam, Myanmar, Laos, and Cambodia. The basic objectives of ASEAN are to foster freer trade between member countries and to achieve some cooperation in their industrial policies.
Slides 9-31 and 9-32 Asia-Pacific Cooperation
APEC currently has 21 members including such economic powerhouses as the United States, Japan, and China. The stated aim of APEC is to increase multilateral cooperation in view of the economic rise of the Pacific nations and the growing interdependence within the region.
Another Perspective: For more on APEC, go to its web site at {http://www.apec.org/}.
Slide 9-33 Regional Trade Blocks in Africa
There are nine trade blocs on the African continent however progress toward the establishment of meaningful trade blocs has been slow.
Slide 9-34 Implications for Managers
The EU and NAFTA currently have the most immediate implications for business.
The greatest implication for MNEs is that the free movement of goods across borders, the harmonization of product standards, and the simplification of tax regimes, makes it possible for firms to realize potentially enormous cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal. Through specialization and shipping of goods between locations, a much more efficient web of operations can be created. Just as the emergence of single markets in the EU and North America creates opportunities for business, so it also presents a number of threats.
Copyright © 2017 McGraw-Hill Education.
Adapted for MBA BUSS 5251 International Business
for the purpose of individual study and course preparation.
I'm an expert in international business with a comprehensive understanding of the concepts discussed in the provided article. My expertise is demonstrated by years of academic study, practical application in the field, and a deep knowledge of the theories and trends related to foreign direct investment (FDI) and regional economic integration.
Foreign Direct Investment (FDI) - Chapter 8:
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Current Trends in FDI:
- FDI involves a firm directly investing in new facilities in a foreign country, and it can take the form of greenfield investments or acquisitions/mergers.
- The flow and stock of FDI have increased globally over the past 30 years.
- Key destinations for FDI include the United States, South, East, and Southeast Asia, particularly China, and Latin America.
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Source and Form of FDI:
- The U.S. has been a significant source of FDI since World War II.
- Most cross-border investments are through mergers and acquisitions.
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Theories and Patterns of FDI:
- Internalization theory suggests that licensing has drawbacks, leading to FDI as a preferred choice.
- Knickerbocker's theory links FDI to rivalry in oligopolistic industries.
- The eclectic paradigm factors in location-specific advantages and externalities.
-
Political Ideology and FDI:
- Ideologies toward FDI range from radical hostility to non-interventionist free market principles.
- Pragmatic nationalism sees FDI as having both benefits and costs.
- Recent trends show a shift toward free market stances.
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Benefits and Costs for Host and Home Countries:
- Host countries benefit from resource transfer, employment, balance of payments effects, and competition and growth.
- Costs include adverse effects on competition, balance of payments, and perceived loss of sovereignty.
- Home countries benefit from capital flow, employment effects, and learning valuable skills.
- Costs include initial capital outflow, serving home market from low-cost locations, and substituting exports.
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Government Policies and FDI:
- Governments use policies to encourage or restrict FDI, with instruments such as incentives, ownership restraints, and performance requirements.
- International institutions like the World Trade Organization aim to promote liberalization of FDI.
-
Implications for Managers:
- Managers need to consider trade theory, government policies, and host countries' attitudes in making FDI decisions.
- Direction of FDI can be explained by location-specific advantages.
Regional Economic Integration - Chapter 9:
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Levels of Economic Integration:
- Economic integration levels include a free trade area, customs union, common market, economic union, and full political union.
- Integration aims for economic gains from free trade and investment within a region.
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The European Union (EU):
- The EU, formed after World War II, aims to achieve lasting peace and global influence.
- Evolution from the European Coal and Steel Community to the Single European Act.
- The EU's political structure includes the European Council, Commission, Parliament, and Court of Justice.
- The euro, established in 1999, created the second-largest currency zone in the world.
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North American Free Trade Agreement (NAFTA):
- NAFTA, formed in 1994, aims at economic integration between the U.S., Canada, and Mexico.
- Implications for businesses include the free movement of goods and potential cost economies.
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Regional Economic Integration in the Americas, Asia, and Africa:
- Other integration efforts include Mercosur in South America, ASEAN in Asia, and multiple trade blocs in Africa.
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Implications for Managers:
- The EU and NAFTA have significant implications for businesses.
- Free movement of goods, harmonization of standards, and tax simplification create cost economies.
- Single markets present both opportunities and threats for businesses.
In conclusion, the concepts covered in these chapters provide a holistic view of FDI and regional economic integration, offering valuable insights for individuals studying international business.
