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 CHAPTER 7
FOREIGN DIRECT INVESTMENT

Text Chapter Outline

OPENING CASE: Foreign Retailers in India

LEARNING OBJECTIVES

INTRODUCTION

FORIGN DIRECT INVESTMENT IN THE WORLD ECONOMY

Trends in FDI
The Direction of FDI
The Source of FDI
The Form of FDI: Acquisitions versus Greenfield Investments

Canada’s Case

THEORIES OF FORIGN DIRECT INVESTMENT

Why Foreign Direct Investment?

Country Focus: Foreign Direct Investment in China
Management Focus: Four Seasons Hotels and Resorts
The Pattern of Foreign Direct Investment
The Eclectic Paradigm

POLITICAL IDEOLOGY AND FOREIGN DIRECT INVESTMENT

The Radical View

The Free Market View
Pragmatic Nationalism
Shifting Ideology

COSTS AND BENEFITS OF FDI TO THE NATION-STATE

Host Country Effects: Benefits

Host Country Effects: Costs
Home Country Effects: Benefits
Home Country Effects: Costs
International Trade Theory and Foreign Direct Investment

GOVERNMENT POLICY INSTRUMENTS AND FDI

Global Business Today, 4CE Instructors Manual Chapter 7

 Home Country Policies
Host Country Policies
International Institutions and the Liberalization of FDI

IMPLICATIONS FOR BUSINESS

The Theory of FDI

Government Policy

SUMMARY OF CHAPTER

LEARNING OBJECTIVES SUMMARY

CRITICAL THINKING AND DISCUSSION QUESTIONS

CLOSING CASE: Walmart in Japan

Global Business Today, 4CE Instructors Manual Chapter 7

 LEARNING OBJECTIVES
1. Recognize current trends regarding foreign direct investment (FDI) in the world economy.
2. Explain the different theories of FDI.
3. Understand how political ideology shapes a government’s attitudes toward FDI.
4. Describe the benefits and costs of FDI to home and host countries.
5. Explain the range of policy instruments that governments use to influence FDI.
6. Identify the implications for managers of the theory and government policies associated with FDI.

Chapter Summary

This chapter focuses on the topic of foreign direct investment (FDI). FDI occurs when a firm invests directly in
new facilities to produce and/or market a product in a foreign country. At the outset, the chapter discusses the
growth in FDI, particularly by medium-sized and small firms. The theoretical underpinnings of FDI are
discussed, which describe under what circumstances it is advantageous for a firm to invest in production
facilities in a foreign country. The chapter also addresses the different policies that governments have toward
foreign direct investment. Some governments are opposed to FDI and some governments encourage it. Three
specific ideologies of FDI are discussed, including the radical view, the free market view, and pragmatic
nationalism. The chapter also provides a discussion of the costs and benefits of FDI from the perspective of
both the home country and the host country involved. The chapter concludes with a review of the policy
instruments that governments use to regulate FDI activity by international firms.

OPENING CASE: Foreign Retailers in India

Summary

This case describes the historical realities of retailing in India with a view to the future. India’s current dearth of
distribution infra-structure is seen as an opportunity by numerous foreign retailers including Tesco and
Walmart. It is widely thought that if foreign “expert” retailers were to start up in India, then this would serve as
a positive force in in improving India’s infrastructure. However a bigger challenge to “motivating” foreign
retailers to open up businesses in India can be tied to the fact that once in business, they would be required by
law to source 30 percent of their products from within India.

Suggested Discussion Questions:

QUESTION 1: Why did Walmart walk away from doing business in India?

ANSWER 1: Walmart did not want to compromise its own practice of sourcing its material whereas India
requires foreign retailers to source at least thirty percent of the products they sell from small and medium sized
Indian businesses.

QUESTION 2: Why did Walmart change its expansion strategy in India? What role did control play in
Walmart’s decision to walk away?
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ANSWER 2: Walmart (and Tesco) objected to expansion into India based upon “investment conditions” as
cited in the above summary. Left-wing Indian activists are concerned that large chain stores will create
unemployment amongst its small businesses.

QUESTION 3: Do you think that Walmart will try again to enter India? If so, why? If not, why?

ANSWER 3: Most students will probably recognize that it is very difficult to do business in India. Whether
India streamlines its business requirements for foreign retailers remains to be seen. The potential clearly exists.
Students can discuss this idea from many different stances. – political, economic, social, technological, trade
barriers and so on.

Chapter Outline With Lecture Notes and Teaching Tips

INTRODUCTION

A) This chapter is concerned with the phenomenon of foreign direct investment (FDI). Foreign direct
investment 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.

Teaching Tip: A website that provides an excellent discussion of the role of multinational corporations in the
world economy is available at
http://www.oecdobserver.org/news/archivestory.php/aid/446/The_trust_business.html.

B) FDI takes on two main forms; the first is a greenfield investment, which involves the establishment of a
wholly new operation in a foreign country. The second involves acquiring or merging with an existing firm in
the foreign country.

FOREIGN DIRECT INVESTMENT IN THE WORLD ECONOMY

A) When discussing foreign direct investment, it is important to distinguish between the flow and the stock of
foreign direct investment. The flow of FDI refers to the amount of FDI undertaken over a given time period
(normally a year). The stock of FDI refers to the total accumulated value of foreign-owned assets at a given
time. Outflows of FDI, meaning the flow of FDI out of a country, and inflows of FDI, meaning the flow of FDI
into a country are also discussed.

Trends in FDI

B) Over the past decades there has been a marked increase in both the flow and stock of FDI in the world
economy. The significant growth in FDI has both to do with the political economy of trade as outlined in the
previous chapter and the political and economic changes that have been taking place in developing countries.

C) FDI has grown more rapidly than world trade and world output for several reasons. Businesses view FDI as a
way to circumvent any future trade barriers. FDI has also been driven by the political and economic changes in
many of the world’s developing nations.

Global Business Today, 4CE Instructors Manual Chapter 7

The Direction of FDI

D) Historically, most FDI has been directed at developed nations, particularly the United States, though there
have recently been new players as shown in Figure 7.2

The Source of FDI

E) The United States has been largest source of FDI,but recently it has been overtaken by China (Figure 7.3)..

The Form of FDI: Acquisitions versus Greenfield Investments

F) The majority of cross-border investment is in the form of mergers and acquisitions rather than green-field
investments. Firms prefer to acquire existing assets rather than undertake green-field investments because: (1)
mergers and acquisitions are quicker to execute than green-field investments; (2) it is easier and perhaps less
risky for a firm to acquire desired assets than build them from the ground up; and (3) firms believe that they can
increase the efficiency of an acquired unit by transferring capital, technology, or management skills.

Canada’s Case

G) Canada’s flow of FDI mirrors those of other developed countries. Canada’s FDI flow is expected to remain
promising well into 2015. (See Figure 7.4) For the most part, Canada’s FDI outflow went to Canadian affiliates
and subsidiaries in the United States.

THEORIES OF FOREIGN DIRECT INVESTMENT

A) In this section of the text, several theories of foreign direct investments are discussed. These theories
attempt to explain the observed pattern of foreign direct investment flows.

Why Foreign Direct Investment?

B) Why do so many firms apparently prefer FDI to either exporting (producing goods at home and then
shipping them to the receiving country for sale) or 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)? The answer lies in
the limitations of these methods for exploiting foreign market opportunities producing goods at home and then
shipping them to the receiving country for sale. 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.

Limitations of Exporting

C) The viability of an exporting strategy is often constrained by transportation costs and trade barriers. Much
foreign direct investment is undertaken as a response to actual or threatened trade barriers such as import tariffs
or quotas.
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Limitations of Licensing

D) There is a branch of economic theory known as internalization theory that seeks to explain why firms often
prefer foreign direct investment to licensing as a strategy for entering foreign markets. According to
internationalization theory, licensing has three major drawbacks as a strategy for exploiting foreign market
opportunities: (1) licensing may result in a firm’s giving away valuable technological know-how to a potential
foreign competitor; (2) licensing does not give a firm the tight control over manufacturing, marketing, and
strategy in a foreign country that may be required to maximize its profitability; and (3) a problem arises with
licensing when the firm’s competitive advantage is based not so much on its products as on the management,
marketing, and manufacturing capabilities that produce those products. Such capabilities are often not
amenable to licensing.

E) So, when one or more of the following conditions holds, markets fail as a mechanism for selling know-how
and FDI is more profitable than licensing: (1) when the firm has valuable know-how that cannot be adequately
protected by a licensing contract; (2) when the firm needs tight control over a foreign entity to maximize its
market share and earnings in that country; and (3) when a firm’s skills and know-how are not amenable to
licensing.

Advantages of Foreign Direct Investment

F) It follows from the above discussion that a firm will favour FDI over exporting as an entry strategy when
transportation costs or trade barriers make exporting unattractive. Furthermore, the firm will favour 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.

The Pattern of Foreign Direct Investment

G) Observation suggests that firms in the same industry often undertake foreign direct investment around the
same time and tend to direct their investment activities towards certain locations.

Strategic Behaviour

H) One theory used to explain foreign direct investment patterns is based on the idea that FDI flows are a
reflection of strategic rivalry between firms in the global marketplace. Knickerbocker looked at the relationship
between FDI and rivalry in oligopolistic industries (industries composed of a limited number of large firms). A
critical competitive feature of such industries is the interdependence of the major players: what one firm does
can have an immediate impact on the major competitors forcing a response in kind.

I) Knickerbocker’s theory can be extended to embrace the concept of multipoint competition (when two or
more enterprises encounter each other in different regional markets, national markets, or industries).

The Product Life Cycle

J) Vernon’s view is that firms undertake FDI at particular stages in the life cycle of a product they have
pioneered. They invest in other advanced countries when local demand in those countries grows large enough to
support local production. They subsequently shift production to developing countries when product
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standardization and market saturation give rise to price competition and cost pressures. Investment in
developing countries, where labour costs are lower, is seen as the best way to reduce costs.

K) What Vernon’s theory fails to explain, however, is why it is profitable for a firm to undertake FDI at such
times, rather than continuing to export from its home base, and rather than licensing a foreign firm to produce
its product.

The Eclectic Paradigm

L) The eclectic paradigm has been championed by the British economist John Dunning. Dunning argues that in
addition to the various factors discussed above, 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) and externalities (knowledge spillovers that occur when companies in the same industry
locate in the same area) are also of considerable importance in explaining both the rationale for and the
direction of foreign direct investment.

POLITICAL IDEOLOGY AND FOREIGN DIRECT INVESTMENT

A) Historically, ideology toward FDI has ranged 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

B) The radical view traces its roots to Marxist political and economic theory. Radical writers argue that the
multinational enterprise is an instrument of imperialist domination. They see MNEs as a tool for exploiting host
countries to the exclusive benefit of their capitalist-imperialist home countries. By the end of the 1980s,
however, the radical position was in retreat almost everywhere. There seem to be three reasons for this. First
was the collapse of communism in Eastern Europe. Second, the generally abysmal economic performance of
those countries that embraced the radical position and a growing belief by many of these countries that, contrary
to the radical position, FDI can be an important source of technology and jobs and can stimulate economic
growth. And third, the strong economic performance of developing countries that embraced capitalism rather
than ideology.

The Free Market View

C) The free market view argues that international production should be distributed among countries according
to the theory of comparative advantage. The free market view has been embraced by a number of advanced and
developing nations, including Great Britain, the United States, and Canada, which are among the most open to
FDI, though these governments do intervene in the marketplace. In Canada there are restrictions on foreign
ownership of the Canadian airline industry, as well as extensive restrictions related to broadcasting licenses.

Pragmatic Nationalism

Global Business Today, 4CE Instructors Manual Chapter 7

D) The pragmatic nationalist view is 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.

E) Recognizing this, countries adopting a pragmatic stance pursue policies designed to maximize the national
benefits and minimize the national costs. According to this view, FDI should be allowed only if the benefits
outweigh the costs.

Shifting Ideology

F) In recent years the centre of gravity on the ideological spectrum has shifted strongly toward the free market
stance.

COSTS AND BENEFITS OF FDI TO THE NATION-STATE

Host Country Effects: Benefits

A) There are three main benefits of inward FDI for a host country: the resource transfer effect, the employment
effect, and the balance of payments effect.

Resource-Transfer Effects

B) FDI can make a positive contribution to a host economy by supplying capital, technology, and management
resources that would otherwise not be available.

Employment Effects

C) The beneficial employment effect claimed for FDI is that FDI brings jobs to a host country that would
otherwise not be created there.

Balance-of-Payments Effects

D) The effect of FDI on a country’s balance-of-payments accounts is an important policy issue for most host
governments. A country’s balance-of-payments account is a record of a country’s payments to and receipts
from other countries. The current account is a record of a country’s export and import of goods and services.

E) Governments typically prefer to see a current account surplus than a deficit. There are two ways in which
FDI can help a country to achieve this goal. First, if the FDI is a substitute for imports of goods and services,
the effect can be to improve the current account of the host country’s balance of payments. A second potential
benefit arises when the MNE uses a foreign subsidiary to export goods and services to other countries.

Host Country Effects: Costs

F) Three main costs of inward FDI concern host countries: 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.

Global Business Today, 4CE Instructors Manual Chapter 7

Adverse Effects on Competition

G) Host governments sometimes worry that the subsidiaries of foreign MNEs operating in their country may
have greater economic power than indigenous competitors because they may be part of a larger international
organization.

Adverse Effects on the Balance of Payments

H) The possible adverse effects of FDI on a host country’s balance-of-payments position are twofold. First, set
against the initial capital inflows that come with FDI must be the subsequent outflow of capital as the foreign
subsidiary repatriates earnings to its parent country. A second concern arises when a foreign subsidiary imports
a substantial number of its inputs from abroad, which results in a debit on the current account of the host
country’s balance of payments.

National Sovereignty and Autonomy

I) Many host governments worry that FDI is accompanied by some loss of economic independence. The
concern is that key decisions that can affect the host country’s economy will be made by a foreign parent that
has no real commitment to the host country, and over which the host country’s government has no real control.

Home Country Effects: Benefits

J) The benefits of FDI to the home country arise from three sources. First, the capital account of the home
country’s balance of payments benefits from the inward flow of foreign earnings. Second, benefits to the home
country from outward FDI arise from employment effects. Third, benefits arise when the home country MNE
learns valuable skills from its exposure to foreign markets that can subsequently be transferred back to the home
country.

Home Country Effects: Costs

K) The most important concerns centre on the balance-of-payments and employment effects of outward FDI.
With regard to employment effects, the most serious concerns arise when FDI is seen as a substitute for
domestic production.

International Trade Theory and Foreign Direct Investment

L) When assessing the costs and benefits of FDI to the home country, keep in mind the lessons of international
trade (Chapter 5). International trade theory tells us that home country concerns about the negative economic
effects of “offshore production” may be misplaced.

GOVERNMENT POLICY INSTRUMENTS AND FDI

A) We have now reviewed the costs and benefits of the FDI from the perspective of both home country and host
country. Before tackling the important issue of bargaining between the MNE and the host government, we need
to discuss the policy instruments that governments use to regulate FDI activity by MNEs. Both home countries
and host countries have a range of policy instruments that they can use to regulate FDI activity by MNEs. We
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will look at each in turn.

Home Country Policies

B) By their choice of policies, home countries can both encourage and restrict FDI by local firms.

Encouraging Outward FDI

C) Many investor nations now have government-backed insurance programs to cover major types of foreign
investment risk.

Restricting Outward FDI

D) Virtually all investor countries, including the United States, have exercised some control over outward FDI
from time to time.

Host Country Policies

E) Host countries adopt policies designed both to restrict and to encourage inward FDI.

Encouraging Inward FDI

F) It is increasingly common for governments to offer incentives to foreign firms to invest in their countries.

G) Incentives are motivated by a desire to gain from the resource-transfer and employment effects of FDI. They
are also motivated by a desire to capture FDI away from other potential host countries.

Restricting Inward FDI

H) Host governments use a wide range of controls to restrict FDI. The two most common, however, are
ownership restraints and performance requirements.

I) The rationale underlying ownership restraints seems to be twofold. First, foreign firms are often excluded
from certain sectors on the grounds of national security or competition. Second, ownership restraints seem to be
based on a belief that local owners can help to maximize the resource transfer and employment benefits of FDI
for the host country.

International Institutions and the Liberalization of FDI

J) Until recently there has been no consistent involvement by multinational institutions in the governing of FDI.
With the formation of the World Trade Organization in 1995, this is now changing rapidly.

IMPLICATIONS FOR BUSINESS

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The Theory of FDI

A) The implications of the theories of FDI for business practice are straightforward. First, the location-specific
advantages argument associated with John Dunning helps explain the direction of FDI. However, the location-
specific advantages argument does not explain why firms prefer FDI to licensing or to exporting. In this regard,
from both an explanatory and a business perspective, perhaps the most useful theories are those that focus on
the limitations of exporting and licensing.

Government Policy

B) A host government’s attitude toward FDI should be an important variable in decisions about where to locate
foreign production facilities and where to make a foreign direct investment.

LEARNING OBJECTIVES SUMMARY

This chapter reviewed theories that attempt to explain the pattern of FDI between countries and to examine the
influence of governments on firms’ decisions to invest in foreign countries. The chapter made the following
points:
1. The past few decades have seen a large increase in both the flow and stock of FDI in the world economy.
Any theory seeking to explain FDI must explain why firms go to the trouble of acquiring or establishing
operations abroad when the alternatives of exporting and licensing are available to them.
2. High transportation costs or tariffs imposed on imports help explain why many firms prefer FDI or
licensing over exporting. Firms often prefer FDI to licensing when: (a) a firm has valuable know-how that
cannot be adequately protected by a licensing contract, (b) a firm needs tight control over a foreign entity in
order to maximize its market share and earnings in that country, and (c) a firm’s skills and capabilities are
not amenable to licensing. Knickerbocker’s theory suggests that much FDI is explained by imitative
behaviour by rival firms in an oligopolistic industry. Dunning has argued that location-specific advantages
are of considerable importance in explaining the nature and direction of FDI. According to Dunning, firms
undertake FDI to exploit resource endowments or assets that are location specific.
3. Political ideology is an important determinant of government policy toward FDI. Ideology ranges from a
radical stance that is hostile to FDI to a noninterventionist, free market stance. Between the two extremes is
an approach best described as pragmatic nationalism.
4. Benefits of FDI to a host country arise from resource transfer effects, employment effects, and balance-of-
payments effects. The costs of FDI to a host country include adverse effects on competition and balance of
payments and a perceived loss of national sovereignty. The benefits of FDI to the home (source) country
include improvement in the balance of payments as a result of the inward flow of foreign earnings, positive
employment effects when the foreign subsidiary creates demand for home-country exports, and benefits
from a reverse resource-transfer effect. A reverse resource-transfer effect arises when the foreign subsidiary
learns valuable skills abroad that can be transferred back to the home country. The costs of FDI to the home
country include adverse balance-of-payments effects that arise from the initial capital outflow and from the
export substitution effects of FDI. Costs also arise when FDI exports jobs abroad.
5. Home countries can adopt policies designed to both encourage and restrict FDI. Host countries try to attract
FDI by offering incentives and try to restrict FDI by dictating ownership restraints and requiring that
foreign MNEs meet specific performance requirements.

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 6. Internalization theories identify the profitability of FDI, exporting, and licensing. A host government's
attitude to FDI is an important variable to consider in making the "go global" decision.

Critical Thinking and Discussion Questions

1. In the 1980s, Japanese FDI in the United States grew far more rapidly than US FDI in Japan. Why do you
think this is the case? What are the implications of this trend?

Answer: There are two primary explanations for the inequity in the growth of FDI between the US and Japan.
Firstly, there has been a significant decrease in the US dollar relative to the Japanese Yen. This makes
investment in the US more attractive to Japanese investors and Japanese investments less attractive to US
investors. Secondly, the nature of business in Japan, where long-term business relationships are important and
investments can take a significant period of time to pay off, makes Japan a less attractive place to invest than
the more open US economy. To the extent that the trend is simply a result of exchange rate changes, the trend
will follow changes in exchange rates, and could reverse if the exchange rate change reverses direction. The
implication of this is simply that the value of international investing between the US and Japan will be
determined by the relative value of the currencies. To the extent that the trend is a result of structural
differences in the economies of the US and Japan, it suggests that there will continue to be a disparity in the
flows of FDI between the US and Japan. Hence Japanese companies will find it easier to compete in the US
market against US competitors than US companies will be able to compete in Japan against Japanese
competitors.

2. Compare these explanations of FDI: internalization theory, Vernon’s product life cycle theory, and
Knickerbocker’s theory of FDI. Which theory do you think offers the best explanation of the historical pattern
of FDI? Why?

Answer: Internalization theory seeks to explain why firms often prefer foreign direct investment to licensing as
a strategy for entering foreign markets. According to internationalization theory, licensing has three major
drawbacks as a strategy for exploiting foreign market opportunities: licensing may result in a firm giving away
proprietary technology, licensing does not permit a firm to maintain tight control over its activities, and
licensing is not appropriate when a firm’s competitive advantage is based not so much on its products as on the
management, marketing, and manufacturing capabilities that produce those products.
Vernon’s product life cycle theory argues that firms undertake FDI at particular stages in the life cycle of a
product they have pioneered. They invest in other advanced countries when local demand in those countries
grows large enough to support local production. They subsequently shift production to developing countries
when product standardization and market saturation give rise to price competition and cost pressures.
Investment in developing countries, where labour costs are lower, is seen as the best way to reduce costs.
Finally, Knickerbocker’s theory of FDI suggests that firms follow their domestic competitors overseas. This
theory had been developed with regard to oligopolistic industries. Imitative behaviour can take many forms in
an oligopoly, including FDI.
The second part of this question is designed to stimulate classroom discussion and/or force students to think
through these theories and select the one that they feel provides the best explanation for the historic pattern of
FDI.

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3. Read the opening case on Foreign Retailers in India. Using the market imperfections approach to FDI,
explain what you feel to be successful approaches to doing business in India.

Answer: The student would focus on India’s overly regulated markets and the red tape involved when doing
business in India. Existing distribution systems would be inadequate for western style supply chain
management. Control was also an issue in Walmart walking away from a deal with the India’s Bharti group .

4. You are the international manager of a Canadian business that has just invented a revolutionary new personal
computer that can perform the same functions as IBM and Apple computers and their clones, but costs only half
as much to manufacture. Your CEO has asked you to decide how to expand into the Western European. Your
options are to (i) export from Canada, (ii) licence a European firm to manufacture and market the computer in
Europe, or (iii) set up a wholly owned subsidiary in Europe. Evaluate the pros and cons of each alternative and
suggest a course of action to your CEO.

Answer: In considering expansion into Western Europe, three options will be considered: FDI, licensing, and
export. With export, assuming there are no trade barriers, the key considerations would likely be transport costs
and localization. While transport costs may be quite low for a relatively light and high value product like a
computer, localization can present some difficulties. Power requirements, keyboards, and preferences in model
all vary from country to country. It may be difficult to fully address these localization issues from Canada, but
not entirely infeasible. Since there are many computer manufacturers and distributors in Europe, there are
likely to be a number of potential licencees. But by signing up licencees, valuable technological information
may have to be disclosed, and the competitive advantage lost if the licencees use or disseminate this
information. FDI (setting up a wholly owned subsidiary) is clearly the most costly and time consuming
approach, but the one that best guarantees that critical knowledge will not be disseminated and that localization
can be done effectively. Given the fast pace of change in the personal computer industry, it is difficult to say
how long this revolutionary new computer will retain its competitive advantage. If the firm can protect its
advantage for a period of time, FDI may pay off and help assure that no technological know-how is lost. If,
however, other firms can copy or develop even superior products relatively easily, than licensing, while
speeding up knowledge dissemination, may also allow the firm to get the quickest large scale entry into Europe
and make as much as it can before the advantage is lost.

5. Explain how political ideology of a host government might influence the process of negotiating access
between the host government and a foreign MNE.

Answer: If a host country subscribes to pure free market principles, then there is little to negotiate about. It may
be possible, however, to negotiate with different regions of the country to obtain more favourable tax treatment
or access to local resources. If a host country subscribes to pure radical views, there is also little to negotiate
about since the government will likely prohibit any FDI. As a general rule, as the overall ideology of a country
moves from the left (radical) to the right (free market), the foreign MNE will need to spend less time
negotiating matters relating to access and control and more time on matters relating to incentives and most
favourable locations.

CLOSING CASE: Walmart in Japan

Summary
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Japan has been a tough market for foreign firms to enter. Many Japanese companies have resisted acquisitions
by foreign enterprises because of fears that new owners would restructure too harshly, cutting jobs and breaking
long-standing commitments with suppliers. Foreign investors also state that it is difficult to find talented
management in Japan. A recent OECD study cites that productivity in foreign firms operating within Japan is
oftentimes 60 percent higher than in Japanese firms. Walmart (yet again) tried to impose American style
management techniques and tactics on its Japanese corporation. This proved to be a public relations disaster and
alienated Walmart as a trustworthy retailer.

QUESTIONS

1. FDI has been low in Japan due to government restrictions and regulations, cultural factors, the difficulty of
finding managers willing to move to the new firm, and the overall sluggish economy of the country over the
past few decades, making it less attractive than it was.

2. FDI can bring aggressive competition to the Japanese marketplace, and can be a source of new technology,
ideas and business practices, all of which boost productivity.

3. Walmart's entry into the retail sector boosted productivity by transferring best practices to what was an
inefficient retailer (Seiyu). The major cost was the layoff of 1500 employees, and the resulting low morale of
the remaining workers.

4. It was difficult to make a profit because of bad initial publicity from the layoffs and the inclusion of lower
priced goods, the reluctance of Japanese suppliers to work with Walmart, and the eventual moves of other
retailers that copied Walmart's strategy. If Walmart had acted with greater sensitivity at the beginning (around
issues of firing employees), and had worked as closely with suppliers as it had in other areas around the world,
the results may have been different.

Country Focus: Foreign Direct Investment in China

Summary

This feature explores investment opportunities in China. In the late 1970s, China opened its doors to foreign
investors. By 2000, the country was the recipient of about $64 billion dollars in foreign direct investment.
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.

QUESTIONS:

1. As China continues to open its doors to business, such as the infrastructure commitments by 2020, tax breaks
in certain areas, and a steady macroeconomic environment, foreign investment should continue. However,
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changes in any of these policies, as well as macro political changes resulting in more of a return to China's
Communist past, would delay or change much of this investment.

2. A major indicator would be looking at "political stability", in regards to the country's continued push towards
capitalism. Beyond that would be tariffs and other government regulations, tax policy, economic and currency
polilies, availability of workers (cost of labour, availability of skilled labour), and availability and access (roads,
rail, shipping) to that space.

Management Focus: Four Seasons Hotels and Resorts

Summary

This feature explores the Four Seasons Hotel and Resource chain, which manages hotels and resorts around the
world. Four Seasons manages the hotels, on behalf of the property owners, that have the Four Seasons name.
The company blends a high level of standardized service, while also ensuring that each property is unique.

QUESTIONS:

1. Maintaining Four Season's image, brand and reputation is key to the company. This can be done through
some centralized functions (purchasing, the reservation system which is often the first point of contact with the
customer), all of which are noted in the text. By not expanding too quickly (which can over-extend a company)
as well as through creating individual hotels, yet within one similar brand, the company can balance local needs
and markets with the need to maintain its global image.

2. Like all companies, Four Seasons was hurt by the global economic slowdown. However, business has to
continue, people will continue to travel, and thus there is still a worldwide demand for the company's products.
It can be argued that firms in the "luxury" class, which would include the Four Seasons. Have customers who
are less likely to be materially affected by the economic slowdown, which would not be the case for budget
hotels appealing to price-conscious consumers.

Additional Readings and Sources of Information

Why do Human Rights Matter to Business:

https://www.amnesty.org/en/what-we-do/

The Java Joint that’s Swallowing France:

http://www.bloomberg.com/bw/stories/2002-09-10/the-java-joint-thats-swallowing-france

Will Europe Warm To Starbucks?

http://www.bloomberg.com/bw/stories/2005-01-23/will-europe-warm-to-starbucks

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Global Business Today Canadian 4th Edition Hill Solutions Manual

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Global Business Today, 4CE Instructors Manual Chapter 7

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