Foreign Direct Investment

Introduction
• FDI is an investment made by the firm or an individual in one country into
the business interests located in another country.

• It take place when an investor establish foreign business operations or

acquire foreign business assets.

• When the investment goes from the home country to another country, it is
termed as “Outflow of FDI” and when the investment comes from other
countries to home country, it is termed as “Inflow of FDI”.

• E.g. Toyota originally used to export the cars to the USA. Government of the
USA impose tariffs on cars imported resulting in increase in price of Toyota
cars by 200 per cent. As a result the US customers found the cars
manufactured in the USA cheaper than the imported cars & hence, the
demand for Toyota cars declined drastically. So, Toyota adopted the
strategy of locating its manufacturing unit in the USA by FDI.
 Forms of FDI

1) Purchase of existing assets in the foreign country.

2) New investment in property, plant, equipment etc.
3) Participate in joint venture with local partner.
4) Transfer of assets like human resource, systems, technological know how in
exchange for equity in foreign companies.
E.g. Westin Hotels transferred their managers, cost control systems &
reservation systems.
5) Export of goods for equity.
6) Through trading in equity: Companies invest in equities of foreign
companies by purchasing the equity shares of a foreign company.
E.g. KLM of Netherlands acquired the equity of Northwest Airlines of USA
by giving the KLM equity shares to Northwest Airline’s owner.
 International Investment Theories
1. Ownership Advantage Theory
e.g. Dr. Reddy’s lab started its operation in Europe & South Africa.
Limitation:- Fails to explain means of entering foreign market.

2. Internalization Theory
States that domestic company enters foreign market when cost of
transaction(i.e. cost of negotiating, monitoring and enforcing) with foreign firms
is high.
e.g. Toyota could not shift its competitive advantage i.e. high quality &
sophisticated manufacturing techniques through franchising or licensing to
foreign country. Hence, it internalized its US operations through FDI.
Limitation: Fails to explain reason for locating manufacturing facilities.

3. Dunning’s Electic Theory

• John Dunning incorporates location advantage in addition to ownership &
internalization advantage.
• It is derived by combining the advantage of country location like assets, mineral,
human & other resources with the specific advantages of the firm like
technology, management, marketing capabilities, technical know-how etc.
e.g. Electrolux established its plant in China to take the advantage of low cost labor.
 International Investment Theories
4. Factor Mobility Theory
Capital normally flows from those countries where the return on capital is low
to those countries where the return on capital is high.

5. Product Life Cycle Theory

Firms originally developed the product to establish manufacturing facilities to
produce the product in foreign countries.
e.g. Xerox originally introduced photocopier in the USA. It later spread
manufacturing facilities in Japan(Fuji-Xerox), Great Britain(Rank-Xerox) &
India(Modi-Xerox).
 Factors influencing FDI
A. Supply factors
(a) Production costs (low labor costs, land prices, commercial real estate
rents, tax rates etc.)
e.g. Gum Sun plastics (South Korean) in Mexico and saved two-third of
labor costs.
(b) Logistic
e.g. Coca cola
(c) Availability of natural resource
e.g. US based oil refining companies establish their oil refineries in Saudi
Arabia & other Gulf countries.
(d) Availability of quality human resource at low cost.
e.g. India, China, Malaysia, Thailand.

B. Demand factors
(a) Customer access
e.g. fast food chain, retail outlet.
(b) Manufacturing advantages (decrease in manufacturing costs, first hand
experience with customer, market handling, customer service.
 Factors influencing FDI
(c) Exploitation of competitive advantage.
(d) Customer mobility
e.g. The business firm supplying parts to the Japanese automobile
companies located their production facilities in the USA along with the
Japanese automobile companies.

C. Political factors
(a) Avoidance of trade barriers (like tariffs, quotas)
e.g. Japanese automobiles entered the USA when it increased import tariffs.
(b) Economic development incentives (like low tax rate, development of
infrastructural facilities, employee training program etc.)
 Reasons for FDI
1. To increase sales and profits.
e.g. Coca cola
Toyota & Mercedes increase sales in USA.
2. To enter fast growing market
e.g. IBM entered Japan laptop market in early1990s through FDI as it is
grown by 40 per cent.
3. To reduce costs (labor, transportation, operations)
e.g. Software companies invest in India.
4. To consolidate trade blocs
Preference in doing business with other member countries of Trade blocs.
5. To protect domestic market
Operate in foreign countries to avoid competition with less competitive
domestic firm.
6. To acquire technological & managerial know-how
e.g. US companies acquired from Japanese companies.
 Costs and Benefits of FDI
Benefits to home country
1. Inflow of foreign currencies in the form of dividend, interests etc. E.g.
Nissan’s profits repatriated to Japan from its FDI in UK.
2. FDI increases the export of machinery, equipment, technology etc. from the
home country to the host country. This increases the industrial activity of the
home country.
3. Increased industrial activity increases employment.
4. The home country’s firm learn skills from its exposure to the host country.

Costs to home country

1. There is risk to employment positions. E.g. US textiles moved to Central
America, resulted in retrenchment.
2. Current account position suffers as FDI is a substitute to export.
 Costs and Benefits of FDI
Benefits to host country
1. Resource-transfer effects- Resources like capital, technology, machinery,
equipment, management etc. It will help develop host country economically
and socially. E.g. India
2. Employment effect
3. Balance of payment effects
India faced severe foreign exchange resource crunch and thereby creating
unfavorable balance of payment.
e.g. Nissan established its plant in UK & export 80 per cent of its
automobiles to other countries which improved UK’s balance of payment.

Costs to host country

1. Intensifying competition
2. Negative effect on the balance of payment
a) Foreign companies repatriate the dividends to their home country. E.g.
Coca Cola invested US$18 million in India and transferred US$54 million to
the USA.
b) The MNCs imported goods from the subsidiaries from other countries which
debited current account.
c) National sovereignty and autonomy.
 Implications of FDI for business
• Location specific advantages argument indicates the flow of FDI in order to
take the advantage of mineral & other resources in foreign countries.
• If the costs of transportation are minimum, it would be preferable to export.
• If the cost of transportation and trade barriers are significant, it would be
preferable to go for FDI.
• Licensing can be opted if know-how is not valuable.
• If companies skills and capabilities are not available for licensing, better the
company go for FDI.
 Foreign Direct Investment in India
• The economic liberalization of 1991 have given significant increase to FDI.
• Different measures w.r.t. FDI includes:-
1. Granting of automatic permission for foreign equity participation up to 51 per
cent in high technology & high investment priority industries.
2. Allowing foreign equity participation of 51 per cent in international trading
companies, hotel industry and tourists industry.
3. Constitution of a specialized empowered board in order to attract FDI by
negotiating with multinational companies.
4. Dispersing the bureaucratic rules and regulations which caused delays in
FDI.
5. Allowing MNCs to use their trademarks in India.
6. Allowing 100 per cent foreign equity for setting up of power plants with free
repatriation of profits.
7. Allowing 100 per cent equity contribution by NRIs and corporate bodies with
automatic approval and capital repatriation benefits.
8. Foreign investor can disinvest at market rates on stock exchange.
9. The holding non-banking financial companies can hold foreign equity up to
100 per cent.
 Foreign Direct Investment in India

10. Foreign investors are allowed to establish 100 per cent operating
subsidiaries and should bring at least US$50 million for this purpose.
11. Private sector firms can have FDI up to 49 per cent in automatic route
subject to conformity to Reserve Bank of India guidelines.
12. 100 per cent FDI is permitted in business to business e-commerce, power
sector and oil refining.
13. Manufacturing activities in special economic zones can have 100 per cent
automatic route except for arms, ammunition, explosives, allied defense
equipment, defense equipment and warships, narcotics, hazardous
chemicals, distillation, brewing of alcoholic drink, cigarettes and
manufactured tobacco substitutes.
14. Off shore venture capital funds/companies can use automatic route subject
to SEBI regulations.
15. Insurance companies can have up to 26 per cent under the automatic route
subject to the licensing requirements of Insurance Regulatory and
Development Authority.
 Starbucks Foreign Direct Investment
• Starbuck Corporation is the biggest retailer of coffee in many countries
across the globe.
• Collaboration with the other retailers of the respective countries helped
Starbuck to establish its brand name across various countries.

Foreign Market Analysis Of Starbuck Within Different Markets

• Collaborative, as well as the corporative strategies, have helped the
company in succeeding internationally. The corporation applied to the
flexible strategy for entering within the international market, in the year
1995. Licensing, whole ownership, and the joint venture strategies have
helped the corporation in successfully establishing its strategies throughout
many countries across the world.
• Moreover, the company focused on the desired services provided to the
respective customers.
• The first target market for the Starbuck Corporation was Japan.
• The management team of the company decided to expand its business
process in different parts of the world by having the franchising strategy and
then the company decided to license to its desired format in different parts
of Japan. The primary motive was to enhance the growth and the
development of the business process within the different parts of the world.
 Starbucks Foreign Direct Investment
• The company realized that the pure licensing system will not provide the
complete control to the company for ensuring Japanese Licenses which
was closely followed by the successful formula of Starbuck. Thus, it
became very important for the company to execute its desired business
process within the international markets. Furthermore, the company
established the desired joint venture with a local retailer named Sazaby Inc.
the most interesting fact was that each of the company included in the
venture held a 50% of the total share.
• Starbuck Corporation transferred some of its experienced employees to
Japan in order to replicate the desired experience of Starbuck within the
targeted marketed segments.
• In the year 1998, the corporation purchased a British coffee chain which
was named as Seattle Coffee and the chain had nearly 60 retail stores
which cost for $84 million.
• In the year 1990, there were several stores from Starbuck Corporation
which were opened in different countries such as China, Singapore, Taiwan,
New Zealand, Thailand, Malaysia and South Korea.
Suitability Of Diverse Market Entry Strategies By Starbucks Within
Different Foreign Markets
• The company was engaged in providing the top quality of the customer
services to the respective customers.
• The collaboration with the local partners of the different countries such as
Japan, China and many more helped in establishing the business
processes of Starbuck. Throughout, Asia the common strategy of
Starbuck was to license the desired format of Starbuck that was already in
the United States.
• The company considered the training to the respective employees to be
most important as the training would help in enhancing the overall
performance of the organization.
• The customer’s services for any organization are very important as it helps
in satisfying the respective customers and this evaluates the desired growth
of the concerned organization.
• Many times the corporation turned the licensing into joint-venture and it also
owned some of the subsidiaries.
Suitability Of Staffing Approach Utilized By Starbucks In Japan And In
Relation To Their Corporate Strategy
• As the company introduced the licensing format within the desired market
segments of Japan, therefore, it was very important for the management
team of the Starbuck Corporation to provide suitable training to the
respective employees. The company arranged proper means of training for
the respective employees in order to enhance the satisfaction of the
respective customers.
• Moreover, the hiring, as well as the training programs to the respective
employees in Japan, was considered to be more important s this may
increase the brand reputation of the entire organization.
• Compensation was important for the respective employees, as this would
provide motivation to the respective employees of the organization.
• There is a vast difference between the cultures of the United States and the
Japanese culture, therefore, the employees were provided suitable and
desired to train to enhance the capability while assisting as well as handling
the customers in difficult situations (Starbucks Coffee Company, 2016). The
effective strategies were different as per the different requirements of the
two market segments. Thus, the training programs were also developed on
the basis of different requirements of the customers as per the changing
trends in the market segments.
Conclusions

• At first, the company captured the entire market segments of the United
States by providing the high quality of the coffee and different tastes of the
coffee product to respective customers.
• Then the organization planned to enter into Japan and different countries
and the organization got success with the help of the licensing strategy with
the local retailers.
• The main motive was to sell premium roasted coffee as well as the fresh
brew coffee beverages’ including a large number of other products.
• There was different staffing approach adopted by the Human Resource
department in order to increase the profitability of the organization.
Thank You