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 An investment that gives the


investor a controlling interest in a
foreign Company
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÷  ÷ 
 mives investor a controlling interest in a foreign
Company
 Control can be obtained by less than 50% equity, if
the balance equity is widely dispersed, OR,
 Is in the hands of silent stock holders who have no
say in management.
 In some cases even 100% equity may not
guarantee control due to movt. controlling price,
labour,, dividend distribution etc.
labour
 It could also be exercised by others controlling
some resources required by the company.
 menerally ownership of minimum 10- 10-25 % of
voting stock in a foreign enterprise allows the
investment to be considered as FDI.
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÷ 
  
 ÷ 
 ©hen foreign investors control a company, decisions of national
importance may be made abroad

V
  

 aransfer of certain vital resources (patents, trade marks,


management know-
know-how) to another domestic or foreign company
that can make all its operating decisions independently.
 Investors who control the organization are more willing to transfer
technology and other competitive assets. (Control thro self
handling of operations i.e. Internal to the organization - called
internalization)
 Reducing operating costs due to
‡ Common corporate culture
‡ Use of its own managers who understand its objectives
‡ Avoidance of protracted negotiations with another company
‡ Avoidance of possible problems of enforcement of agreements
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Π   
 
©hen companies produce the same
goods which they produce domestically,
their direct investments are known as
horizontal expansions
expansions..
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 V
 
 
 Direct investment usually (but not always) involves
some capital movement across borders ± normally
when anticipated returns (Accounting for the risk factor
and cost of transfer) are higher than at home.
 It may also involve transfer of other type of assets
(Non financial) ± like manpower, systems, reservation
system, technology, know-
know-how, and sales capabilities.
 In some cases it may also be possible to acquire assets
without international capital movement in a normal
sense ± e.g.
‡ Holding payment in host country for exports to that country i.e.
exchange goods for equity ± generally used for expanding
operations abroad.
‡ Increase in equity out of retained earnings
‡ Cross trading of equity from different countries.
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aa      a 
 Direct investment in the form of capital or other assets
usually involves the movement of various production
factors across countries.
 Both finished goods and production factors are partially
mobile internationally. (If the factors and goods both
do not move internationally, it would mean either
forgoing consumption or producing inefficiently ± thus
reducing output).
 ahis may stimulate efficient methods of substitution-
substitution-
development of alternate products/methods e.g.
Synthetic Rubber, Viscose Fiber, Rayon, alternate
sources of energy.
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Ô
  
 ©hen the factor proportions vary widely between countries,
there are pressures for movement of the most abundant
factors to an area of scarcity. e.g. Labour from India to
Middle East, software engineers from India to US, capital
from Europe / US / Japan to India and China.
 If the finished goods and factors are both free to move
internationally, the comparative cost of transferring would
determine the location of production ± development of
software centers in India.
 aherefore factors and trade are substitutes of each other.
 Internationally labour is more difficult to move than capital
or technology in the form of more efficient machinery. ahus
the difference in labour productivity and costs explain the
movement of trade and direct investment.
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V


 Factor mobility of direct investment also stimulates


trade because of the need for

Components / Raw Materials


Complementary Products
Equipment for Subsidiaries

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 aransportation Costs:
Costs:
‡ Increase in transportation costs makes trading impractical
‡ Low cost, high volume / weight, dangerous / hazardous
goods
 Lack of domestic capacity:
capacity: Lack of spare capacity at home
country plants leads to FDI.
However availability of spare capacity at home plants
usually leads to exporting rather than Foreign Direct
Investment, due to its being considered competitive in
spite of high transportation costs ± due to marginal
cost pricing basis. (arading generally precedes FDI).
Companies want a better indication that they can sell
sufficient quantities before committing resources for
local production.
Learning about foreign operating environment by
exporting before investing in production facilities.

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Ô   

 In small-
small-scale process technology, country by
country production usually reduces unit landed
costs - since transportation is minimized. e.g.
Food Products
‡ However in large scale process technology (Using high
fixed cost capital input), large scale production of
standardized product (Undifferentiated from competitors)
and exportation usually reduces unit landed costs by
spreading fixed costs over more units of output ± Ball
bearings, Alumina, Semiconductors
‡ Plant size must be considered in relation to the market
size being served ± including nearby/other markets being
served.

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a 
 

 Includes non tariff barriers, indirect entry restrictions,


and potential trade restrictions.
 menerally favour larger companies who can commit
large investments; smaller companies generally have
regional plants to service a few markets.
 Sometimes companies make small direct investments
to diffuse the protectionism and tie up production with
R/M and or components export from home plants.
 Market size of the country imposing trade barriers is
important in deciding about FDI. If the country size is
small and can not absorb total production ± FDI may
remain unattractive.
 Removing trade restrictions in a region expands the
market and may therefore lead to expansion of market
and trade diversion. In fact this may stimulate
investment to take advantage of trade diversion.

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÷ 
V

 

× è  ÷  :
:
Alter product to suit local tastes
Compelled by local government to use local raw materials,
aest marketing may be difficult conduct from long distance.
ahe more the product has to be altered to suit the foreign
market, more likely it is to shift production abroad.
× „   
:
 
: be Indian buy Indian, Swadeshi Movement,
boycott of some foreign goods, incentives to buy local ggods
× è  V 
:: Related to a country.
×  
: Many consumers may not prefer to buy
 
:
some goods from abroad to minimize the risk of non/delayed
delivery - due to political problems, strikes etc.
Some consumers may not buy the goods fearing the non
availability of service and / OR spare parts.
Inventory cost may be high in case of imported goods;
impossible to implement JIa manufacturing systems.

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  ! ÷
 

Some companies export indirectly, i.e. they sell products,


components, or services domestically, which when
embedded in the final product or service is exported by their
domestic producer. In such case indirect exporter generally
follows their customers if they make direct investments.
  ! ÷  

In Oligopolistic Industries (with few sellers) several investors


(Competitors) tend to make direct investments in a given
country at about the same time may be due to change in
import restrictions, expansion cycles, market changes it
could also be consideration of ³Opportunity Loss´ relative to
competitor.
 ÷  
÷   ÷


Changes in factor conditions (Inflation, aransportation Costs,


Plant Size, Regulation and Productivity) in least cost location
  !"#
 Seeking
‡ Raw Material,
‡ Production Efficiency
‡ Knowledge
‡ Political advantages (In case of movt.
FDI)
  !"#
  V   
 Control of different stages of the product¶s Value Chain
from R/M through production to its final distribution
 As the products and marketing becomes more
complicated, there is greater need to combine
resources that are located in different countries.
 Could be market oriented or supply oriented, however
most vertical integration is supply oriented.
 It may be possible to gain economies of scale, because
supply and or markets are assured, lesser inventories
need to be maintained and reduction in promotion
expenditure.
 Permits flexibility in shifting funds, taxes and profits
among countries.
  !"#
   è   
 Different components or portions of a product line are
made in different parts of the world to take advantage
of
‡ Factor costs ((Labour
Labour,, Capital, R/M) differences, and
‡ Long production runs
 Smoother earnings during exchange rate fluctuations
 Satisfying host governments regarding local
production, hence value addition in the country

 Disadvantages
 Higher risk of work stoppages
 Record keeping
  !"#
 

      

 Knowledge and other resources


‡ aechnology,
‡ Research facilities (not allowed in home
country).
 è  "÷ a 
 Marketing know-
know-How,
‡ For market and cost reasons
‡ In the introduction stage new products are
mainly produced in industrial countries; in the
growth stage it moves to other industrial
countries. In the maturity stage they are more
likely to be produced in developing countries
and finally in decline stage in the LDC¶s
  !"#
 V

Affect the comparative cost of production among


countries and entice the investors to invest in a
particular country to serve national/international
markets.
‡ aax concessions / Holidays and other subsidies
‡ Accelerated depreciation
‡ low interest loans
‡ loan guarantees
‡ subsidized energy or transport
‡ infrastructure
‡ local tax incentive etc.
  !"#
è   

 movernments take ownership of FDI


or give incentives to direct investors
in order to
‡ main supplies of strategic resources
‡ Stopping other countries from accessing
the same
‡ Developing spheres of influence
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 Avoiding start up problems
 Adding no further capacity in the market
 Easier financing
 Difficulty of sparing home resources like
‡ Manpower ,
‡ Availability of organization structure,
 moodwill
 Brand identification (Specially if cost of new brand
building is high)
 Distribution structure
 Reduction in costs
 Quicker start up
 mives immediate cash flow
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 No desired company available
 Acquisition will carry past problems
 Harder to finance
 movernment restriction (MRaP / other reasons)