1. Foreign Direct Investment + Timing
of Entry
International Business and Institutions
Lecture (TW3)
Dr. Amelia Au-Yeung
Dr Amelia Au-Yeung BS2021 1
2. Re-Cap: Modes of Serving a Foreign
Country
• Export
• Licensing/Franchising
• Joint Venture
• Greenfield Wholly Owned Subsidiary => FDI
• Mergers & Acquisitions
Dr Amelia Au-Yeung BS2021 2
3. FDI Definitions & 2010 Overview
Foreign direct investment:
equity fund invested in the establishment by a company of a
productive base in another country, involving substantial
shareholding and managerial control in the foreign operation
• Emerging markets absorbed > half of world FDI inflows
• FDI outflows from emerging markets also increased strongly by 21%,
making them account for 29% of world’s FDI outflow
• FDI to developed countries remained well below pre-crisis level
• Top transnational corporations (TNCs) in 2010 include: General
Electric, Royal Dutch/Shell Group, British Petroleum, Vodafone,
Toyota Motor Corporation, ExxonMobil Corporation
• 7 TNC from developing countries appearred in the Top 100 non-
financial TNCs List: Hutchison Whampoa Ltd, Vale SA, CITIC
Group, Samsung Electronics, Petronas, Cemex, and Hyundai Motor.
Dr Amelia Au-Yeung BS2021 3
4. Why Firms Undertake FDI?
Comparing to export and licensing/franchsing, FDI
is:
• Expensive
– due to costs of establishing production facility
• Risky
– Due to problems related to doing business in an
unfamiliar environment
=> Why do firms undertaking FDI then?
Dr Amelia Au-Yeung BS2021 4
5. Internalisation Theory
Firms still undertake FDI because there are other factors involved:
• Transportation costs
• Trade barriers/government intervention
• Opportunistic behaviour of firms
• Bounded rationality
• Tight control needed for strategic reasons
• Tacit nature of knowledge
⇒ These are called Market Imperfections
⇒ Due to the existence of Market Imperfections, firms would like
to internalise instead of using the market (arm-length
transactions)
Internalisation Theory
Dr Amelia Au-Yeung BS2021 5
6. • Mini Case: Management Focus: Foreign Direct Investment by Cemex p.277
Dr Amelia Au-Yeung BS2021 6
7. Eclectic Paradigm by John Dunning
• An attempt to integrate various strands of explanation,
derived from a variety of theoretical approaches to explain
the why, when, where and how of FDI. This paradigm is
sometimes called the OLI paradigm.
• A firm will engage in FDI when all of the following three
conditions are present:
– The firm possesses certain ownership advantages not possessed by
other competing firms
– There must be location-specific factors that make it more
profitable for the firm to exploit its assets in foreign, rather than in
domestic, location => Location Advantages
– The ownership advantages must be most suitably exploited by the
firm itself rather than by selling or leasing them other firms =>
Internalisation Advantages
Dr Amelia Au-Yeung BS2021 7
8. • Ownership Advantages
– assets internal to a firm
– Could be created by an enterprise internally or purchased from other
institutions
– Examples: technology, knowledge, patent, know-how, size
• Internalisation Advantages
– Why should a firm internalise? Because of market imperfection (go back
to Slide 4)
• Location Advantages
– Location specific factors are those factors that are available, on the same
terms, to all firms whatever their size and nationality, but which are
specific in origin to particular locations and have to be used in those
locations.
– Examples: markets, resources, production costs, political conditions,
cultural/linguistic affinities, concentration of knowledge development
Dr Amelia Au-Yeung BS2021 8
10. Types of FDI
• Market seeking FDI —FDI undertaken to satisfy a
particular or a set of foreign markets
• Resource seeking FDI —FDI undertaken to gain access to
natural resources
• Rationalised or efficiency seeking FDI —FDI undertaken
to promote a more efficient division of labour or
specialisation of an existing portfolio of foreign and
domestic assets by MNEs
• Strategic asset seeking FDI —FDI undertaken to protect or
augment the existing ownership specific advantages of the
investing firms or to reduce those of their rivals
Dr Amelia Au-Yeung BS2021 10
11. Timing of Entry: First Mover
Advantages & Disadvantages
• Advantages • Disadvantages
– Higher brand – Pioneering costs: arise due to
recognition different business system=>
– More positive brand devote time, effort and expense
image to learning the rules of the game
• Ignorance of foreign
– More customer loyalty environment, trial and error
– Create switching cost • Cost of educating customers
(e.g. lock-in) • Cost of educating
– First choice of sites & suppliers/distributors
distribution channels • Change in regulations (rules
– Experience curve governing business practices
(Longer experience) in many developing countries
are still evolving)
Dr Amelia Au-Yeung BS2021 11
12. Preparation for Next Lecture
• Have a look at Proctor and Gamble (P&G)’s
company website to gain some basic, background
understanding of the company, in particular
regarding the product range (e.g. you can look via
the ‘brand’ icon near the top of the page) and
range of countries the company has entered (e.g.
you can look via the ‘worldwide sites’ icon near
the top of the page):
http://www.pg.com/en_US/index.shtml
Dr Amelia Au-Yeung BS2021 12
