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Chapter 07 - Foreign Direct Investment
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Chapter 07 - Foreign Direct Investment
Introduction
Chapter Summary
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Chapter 07 - Foreign Direct Investment
Ask students for examples of foreign firms that have invested in the U.S. Jot them down
on the board.
Then, discuss why these companies invested in the U.S. Try to follow the framework
presented in the text, and refer back to the board during the presentation of the material.
1. Reflect on the various entry strategies used by Starbucks. Why did the company
approach markets using so many entry modes? Was it wise for Starbucks to depart from
its domestic strategy of expanding only through company owned stores?
2. Why is it important for Starbucks to require the same store format in its foreign stores?
3. Where do you think the best opportunities for future growth lie for Starbucks? Why?
Another Perspective: Students may want to explore Starbucks’ web site to see where its
most recent stores have opened, and what form of investment was used. The site is
available at {http://www.starbucks.com}. Click on “international” to see a list of
countries where the company operates.
Another Perspective: To expand this case, consider asking students to explore Starbucks’
recent entry into the French market, and its strategic changes in its Chinese operations.
Details on both can be found at
{http://www.businessweek.com/globalbiz/content/apr2006/gb20060420_895395.htm?
chan=search} and
{http://www.businessweek.com/globalbiz/content/oct2006/gb20061025_712453.htm?
chan=search}.
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Chapter 07 - Foreign Direct Investment
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. 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 along with teaching tips, and additional perspectives.
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://money.cnn.com/magazines/fortune/global500/2006/}. 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 where 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}.
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Chapter 07 - Foreign Direct Investment
Vernon argued that firms undertake FDI at particular stages in the life cycle of a product
they have pioneered.
According to the eclectic paradigm, in addition to the various factors discussed earlier, it
is important to consider:
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
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Chapter 07 - Foreign Direct Investment
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Chapter 07 - Foreign Direct Investment
Another Perspective: The World Bank has a wonderful site devoted to foreign direct
investment. Students can start exploring the site by going to
{http://rru.worldbank.org/Themes/ForeignDirectInvestment/}. Then click on “Doing
Business” to see an option to download summaries on 175 countries, or to generate
instant reports comparing countries on various factors. The site is easy to navigate and
contains a wealth of information.
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QUESTION 1: In 2004, inward FDI accounted for some 24% of the gross fixed capital
formation in Ireland, but only .6% in Japan. What do you think explains the difference in
FDI inflows into the two countries?
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Chapter 07 - Foreign Direct Investment
QUESTION 3: Read the opening case on Starbucks and then answer the following
questions:
a) Initially, Starbucks expanded internationally by licensing its format to foreign
operators. It soon became disenchanted with this strategy. Why?
b) Why do you think Starbucks has now elected to expand internationally primarily
through local joint ventures, to whom it licenses its format, as opposed to using a pure
licensing strategy?
c) What are the advantages of a joint venture entry mode for Starbucks over entering
through wholly-owned subsidiaries? On occasion, Starbucks has chosen a wholly owned
subsidiary to control its foreign expansion (e.g. in Britain and Thailand). Why?
d) Which theory of FDI best explains the international expansion strategy adopted by
Starbucks?
ANSWER 3:
a) Starbucks initially approached its foreign expansion using licensing. However, the
company realized that a pure licensing format would not give it the control it desired.
b) Starbucks established a joint venture with a Japanese company, and licensed its
formula to the joint venture as a way to gain more control over its foreign expansion.
Expanding through joint ventures was also attractive because it gave Starbucks access to
knowledge of the local market.
c) The advantages of a joint venture entry mode for Starbucks as compared to wholly-
owned subsidiaries include access to knowledge of the local market and the opportunity
to share the costs and risks of expansion.
d) Internalization theory seems to provide some relevant explanation for Starbucks’
decisions about its foreign strategy
Another Perspective: Students may want to explore Starbucks’ web site to see where its most
recent stores have opened, and what form of investment was used. The site is available at
{http://www.starbucks.com}. Click on “international” to see a list of countries where the
company operates.
Another Perspective: To expand this case, consider asking students to explore Starbucks’ recent
entry into the French market, and its strategic changes in its Chinese operations. Details on both
can be found at
{http://www.businessweek.com/globalbiz/content/apr2006/gb20060420_895395.htm?
chan=search} and
{http://www.businessweek.com/globalbiz/content/oct2006/gb20061025_712453.htm?
chan=search}.
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Chapter 07 - Foreign Direct Investment
QUESTION 4: You are the international manager of a US business that has just invented
a revolutionary new personal computer that can perform the same functions as existing
PCs but costs only half as much to manufacture. Several patents protect the unique
design of this computer. Your CEO has asked you to formulate a recommendation for
how to expand into Western Europe. Your options are (a) to export from the US, (b) to
license a European firm to manufacture and market the computer in Europe, and (c) to 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.
Summary
The closing case examines Cemex’s rise to global status. Cemex is the world’s third
largest cement company and Mexico’s largest multinational company. In Mexico, Cemex
is known for its efficient manufacturing and excellent customer service. Cemex began its
international expansion in an effort to reduce its reliance on the Mexican market, to
capitalize on demand in developing countries and its knowledge of developing companies
needs, and finally, to increase its value by acquiring inefficient companies and
transferring its skills to those companies. Cemex plans to continue its foreign expansion,
and believes that China and India will be important markets in the future. Discussion of
the case can revolve around the following questions:
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Chapter 07 - Foreign Direct Investment
QUESTION 2: What is the value that Cemex brings to the host economy? Can you see
any potential drawbacks of inward investment by Cemex in an economy?
ANSWER 2: Cemex is the third largest cement company in the world, and a powerhouse
in Mexico where it controls 60 percent of the market. Cemex is highly focused on
efficient manufacturing and customer service. Distributors are rewarded for their sales,
as are users. The primary benefit Cemex brings to host countries involves these
competitive advantages. Cemex acquires companies and then transfers technological,
management, and marketing know-how to the new units, improving their performance.
The company has brought several acquired companies back to full production, increasing
employment opportunities in the host country as well.
QUESTION 3: Cemex has a strong preference for acquisitions over greenfield ventures
as an entry mode. Why?
QUESTION 4: Why do you think Cemex decided to exit Indonesia after failing to gain
majority control of Semen Gresik? Why is majority control so important to Cemex?
ANSWER 4: Much of Cemex’s success appears to be built around its customer service
and attention to distributors. Indeed, it could be argued that what sets Cemex apart from
its competitors, or its competitive advantage, is its superior way of dealing with external
stakeholders. It is significantly easier to duplicate this sort of advantage in a wholly
owned operation than in a joint venture or through licensing arrangements.
QUESTION 5: Why do you think politicians in Indonesia tried to block Cemex’s attempt
to gain majority control over Semen Gresik? Do you think Indonesia’s best interests
were served by limiting Cemex’s FDI in the country?
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Chapter 07 - Foreign Direct Investment
INTEGRATING iGLOBES
There are several iGLOBE video clips that can be integrated with the material presented
in this chapter. In particular, you might consider the following:
Abstract: This video explores the consequences of Chinese investment in Sudan’s oil
industry and the challenges facing the Sudanese economy.
Notes: Change is the name of the game in Sudan these days. Seven years ago, the
Chinese began investing in Sudan’s oil industry, and since then, many Sudanese have
seen their lives improve. Tariq Ibrahim, a Sudanese entrepreneur educated in the United
States, for example, opened a hugely successful copy shop modeled after Kinkos
targeting oil companies and their executives. Profits are so high that Tariq Ibrahim has
been able to pay his employees significantly more than he ever thought possible. Osama
Daoud Abdelatif, now the country’s largest private employer, has built a conglomerate
involving everything from cars to Coca-Cola. According to Osama Daoud Abdelatif,
every aspect of business is booming thanks to the oil investment.
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In Khartoum, the site of an oil refinery, change is everywhere. Chinese know-how and
labor have helped make the economy one of the fastest growing in the world. In
downtown Khartoum hundreds of new villas targeted at the business elite are currently
under construction. However, Sudan’s newfound wealth has also caused the gap between
the rich and poor to widen. Prior to the discovery of oil in Sudan, the country had relied
on agriculture. Now, fed up with antiquated methods and droughts, many farmers are
abandoning their fields. Some have questioned why, given its newfound wealth, the
country has failed to modernize its agricultural sector. One former deputy finance
minister has warned that if the disparities between rich and poor are not addressed soon,
political unrest will increase rise and could cause investors to withdraw.
Complaints about the government are common. Some entrepreneurs complain that
corruption is making it difficult for them to succeed. Others echo the worry that wealth is
not being evenly shared. Osama Daoud Abdelatif has suggested that the government
limit its involvement in the economy to areas such as education and healthcare. For its
part, the government claims that it has changed, and notes that it no longer supports
Osama bin Laden, has settled two civil wars, and intends to be a good global citizen.
Still, not everyone is convinced. There is still concern over the situation in Darfur, and
how people in Sudan are treated. One businessman stated that if things fail to improve,
he will return to England where he was educated.
Discussion Questions:
1. China’s 40 percent stake in Sudan’s oil industry has brought significant changes to
Sudan. Describe the benefits of the investments to the Sudanese. What, if any, are the
disadvantages of the investment? Consider the new challenges the investment brings to
Sudan.
2. China has made a significant investment in Sudan. What does China gain from making
this investment?
3. Sudan’s newfound wealth has raised concerns that the gap between rich and poor has
widened. Discuss this concern from the perspective of both the rich and the poor. Does
the government bear any responsibility to ensure the wealth is more evenly distributed?
Why or why not?
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Chapter 07 - Foreign Direct Investment
INTEGRATING VIDEOS
There are also several longer video clips that can be integrated with the material
presented in this chapter. In particular, you might consider the following:
Summary
Starbucks opened its first store in 1971. Today, the company, which has grown to over
6,000 stores located in 30 different countries, consumes 1.5 percent of the world’s coffee
production. A key issue challenging Starbucks is ensuring a consistent supply of
premium grade coffee beans for its roasters, a problem that is complicated by volatile
prices for coffee on the world market. In the last 15 years supply of coffee has exceeded
demand driving the price of coffee to 50 cents a pound. This price is less than what it
costs the farmer to produce that same pound of coffee. As a result many small farmers
have gone out of business or turned to growing other sustainable subsistence crops.
In an effort to promote the sustainability and stability of the industry, Starbucks has
formed long- term relationships with farmers agreeing to pay them a fair price for their
coffee to ensure the sustainability of this industry. Starbucks has also established a
program to offer bridge loans to farmers. These loans, which are paid back as soon as
coffee is picked, provide assistance to farmers that are having difficulty accessing credit
because of the unpredictability of their business.
Discussion Questions
1. What crisis did coffee growers face in the last 15 years? How has Starbucks’ program
to provide bridge loans helped coffee growers?
2. Starbucks consumes 1.5 percent of the world’s total coffee production. Why is it so
important to the company to maintain a consistent supply of premium coffee? Why did
Starbucks believe in building relationships with coffee growers?
3. How does lack of property rights in many tropical countries affect the coffee farmer?
4. Coffee prices have fallen dramatically over the last 15 years, so much so that prices are
currently below the cost of production. How do Starbucks’ agreements with its suppliers
protect them from this problem?
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Chapter 07 - Foreign Direct Investment
Exercise 1
The World Investment Report published annually by UNCTAD provides quick electronic
access to comprehensive statistics on foreign direct investment (FDI) and the operations
of transnational corporations. Gather a list of the top transnational corporations in terms
of foreign direct investment. Also, identify each company’s home country (i.e.,
headquarters country). Provide a commentary about the characteristics of countries that
have the greatest number of transnational firms. Are there any common traits you notice
concerning countries with many transnational firms?
Exercise 2
Your company is considering opening a new factory in Latin America, and management
is in the process of evaluating the specific country locations for this direct investment.
The pool of candidate countries has been narrowed to Argentina, Mexico, and Brazil.
Prepare a short report from a well-known organization’s publication of Country Fact
Sheets to compare the foreign direct investment environment and regulations of these
three countries.
Answers to Exercises
Exercise 1
The data source can be accessed by searching the term “World Investment Report” at
{http://globaledge.msu.edu/ResourceDesk/}. The link to the World Investment Report is
found under the globalEDGE category “Research: Statistical Data Sources”. On this
website, the list of members top transnational corporations can be found under the
“Largest TNCs” link, located on the left of the page. Be sure to check the “Resource
Desk only” checkbox of the search function on the globalEDGE website.
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Exercise 2
The foreign direct investment statistics are provided by a variety of sources. One of the
most comprehensive sources is the UNCTAD’s Country Fact Sheets and can be accessed
by searching the term “Country Fact Sheets” at
{http://globaledge.msu.edu/ResourceDesk/}. The link to the Country Fact Sheets is
found under the globalEDGE category “Research: Statistical Data Sources”. On this
website, country specific information can be found by following the “Country Fact
Sheets” link, located on the right side of the page. Be sure to check the “Resource Desk
only” checkbox of the search function on the globalEDGE website.
Alternatively, a lot of the same statistics, as well as detailed write-ups of the FDI
environment can also be reached through the Country Commercial Guides. See Chapter 5
– Exercise 1 for instructions on how to reach the Country Commercial Guides through
globalEDGE™.
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