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INTERNATIONAL FINANCIAL MANAGEMENT
Fourth Edition
EUN / RESNICK
16-0
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Foreign Direct Investment and CrossBorder Acquisitions
About 90% of total world-wide FDI comes from the developed world.
Both developing and developed nations are the recipient of inflows of FDI.
16-4
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
16-5
A us
100 120 140 160
8.4 7 29.3 29.2 2.8 47.2 42.7 13.2 13.4
Inflows
1.8
20
40
46.8 99.6
60
64.9
80
0
8.6
30.7 16.4 40.4 50.4 28.6 36.9 22.2 19.4 11.5 22.9 60.3
16-9
Country Germany U.S. Japan Israel Taiwan Mexico
Hourly Cost $31.25 $21.97 $20.09 $11.73 $5.84 $2.48
U.S. Department of Labor, Bureau of Labor Statistics Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Intangible Assets
Coca-Cola has a very valuable asset in its closely guarded “secret formula”. To protect that proprietary information, Coca-Cola has chosen FDI over licensing. Since intangible assets are difficult to package and sell to foreigners, MNCs often enjoy a comparative advantage with FDI.
16-1 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Outline
Global Trends in FDI Why Do Firms Invest Overseas? Why Do Firms Invest Overseas? Trade Barriers Cross-Border Mergers and Acquisitions Imperfect Labor Markets Political Risk and FDI Intangible Assets
Global Trends in FDI
Foreign Direct Investment often involves the establishment of production facilities abroad. Greenfieles building new facilities from the ground up. Involves the purchase of existing business.
The restrictions may be immigration barriers or simply social preferences.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
16-8
16-6
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Trade Barriers
Government action leads to market imperfections. Tariffs, quotas, and other restrictions on the free flow of goods, services and people. Trade Barriers can also arise naturally due to high transportation costs, particularly for low value-toweight goods.
Vertical Integration Product Life Cycle Shareholder Diversification
Cross-Border Mergers and Acquisitions Political Risk and FDI
16-2
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Recall that the factors of production are land, labor, capital, and entrepreneurial ability.
If there exist restrictions on the flow of workers across borders, then labor services can be underpriced relative to productivity.
16-12
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Product Life Cycle
The U.S.
Quantity exports imports
Quantity
Less advanced countries
Cross-Border Acquisition
16-3
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Global Trends in FDI
Several developed nations are the sources of FDI outflows.
Average Annual FDI (in Billions) 1999-2004
Outflows
tra Ca lia na da Ch in Fr a a G nce er m an y I ta ly Ja pa M n N ex et ic he o r la nd s Sp a S w in S e U wi den ni tz te er d la K nd U ing ni d te om d St at es
16-10
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Vertical Integration
MNCs may undertake FDI in countries where inputs are available in order to secure the supply of inputs at a stable accounting price. Vertical integration may be backward or forward:
Product Life Cycle
U.S. firms develop new products in the developed world for the domestic market, and then markets expand overseas. FDI takes place when product maturity hits and cost becomes an increasingly important consideration for the MNC.
Chapter Objective:
INTERNATIONAL FINANCIAL MANAGEMENT
Chapter Sixteen
16
This chapter discusses various issues associated with foreign direct investments by MNCs, which Third play a key role in shaping the nature of the Edition EUN / RESNICK emerging global economy.
Backward: e.g. a furniture maker buying a logging company. Forward: e.g. a U.S. auto maker buying a Japanese auto dealership.
16-11
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
116.8 149.9 148.8
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Why Do Firms Invest Overseas?
Trade Barriers Labour Market Imperfections Intangible Assets Vertical Integration Product Life Cycle Shareholder Diversification
Labour Market Costs Around the World (2001)
Persistent wage differentials across countries exist. This is one on the main reasons MNCs are making substantial FDIs in less developed nations.
Product Life Cycle
It should be noted that the Product Life Cycle theory was developed in the 1960s when the U.S. was the unquestioned leader in R&D and product innovation. Increasingly product innovations are taking place outside the United States as well, and new products are being introduced simultaneously in many advanced countries. Production facilities may be located in multiple countries from product inception.
16-7
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Labor Market Imperfections
Among all factor markets, the labor market is the least perfect.
New product
Maturing product
Standardized product exports
imports
New product
16-13
Maturing product
Standardized product
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Fourth Edition
EUN / RESNICK
16-0
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Foreign Direct Investment and CrossBorder Acquisitions
About 90% of total world-wide FDI comes from the developed world.
Both developing and developed nations are the recipient of inflows of FDI.
16-4
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
16-5
A us
100 120 140 160
8.4 7 29.3 29.2 2.8 47.2 42.7 13.2 13.4
Inflows
1.8
20
40
46.8 99.6
60
64.9
80
0
8.6
30.7 16.4 40.4 50.4 28.6 36.9 22.2 19.4 11.5 22.9 60.3
16-9
Country Germany U.S. Japan Israel Taiwan Mexico
Hourly Cost $31.25 $21.97 $20.09 $11.73 $5.84 $2.48
U.S. Department of Labor, Bureau of Labor Statistics Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Intangible Assets
Coca-Cola has a very valuable asset in its closely guarded “secret formula”. To protect that proprietary information, Coca-Cola has chosen FDI over licensing. Since intangible assets are difficult to package and sell to foreigners, MNCs often enjoy a comparative advantage with FDI.
16-1 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Outline
Global Trends in FDI Why Do Firms Invest Overseas? Why Do Firms Invest Overseas? Trade Barriers Cross-Border Mergers and Acquisitions Imperfect Labor Markets Political Risk and FDI Intangible Assets
Global Trends in FDI
Foreign Direct Investment often involves the establishment of production facilities abroad. Greenfieles building new facilities from the ground up. Involves the purchase of existing business.
The restrictions may be immigration barriers or simply social preferences.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
16-8
16-6
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Trade Barriers
Government action leads to market imperfections. Tariffs, quotas, and other restrictions on the free flow of goods, services and people. Trade Barriers can also arise naturally due to high transportation costs, particularly for low value-toweight goods.
Vertical Integration Product Life Cycle Shareholder Diversification
Cross-Border Mergers and Acquisitions Political Risk and FDI
16-2
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Recall that the factors of production are land, labor, capital, and entrepreneurial ability.
If there exist restrictions on the flow of workers across borders, then labor services can be underpriced relative to productivity.
16-12
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Product Life Cycle
The U.S.
Quantity exports imports
Quantity
Less advanced countries
Cross-Border Acquisition
16-3
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Global Trends in FDI
Several developed nations are the sources of FDI outflows.
Average Annual FDI (in Billions) 1999-2004
Outflows
tra Ca lia na da Ch in Fr a a G nce er m an y I ta ly Ja pa M n N ex et ic he o r la nd s Sp a S w in S e U wi den ni tz te er d la K nd U ing ni d te om d St at es
16-10
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Vertical Integration
MNCs may undertake FDI in countries where inputs are available in order to secure the supply of inputs at a stable accounting price. Vertical integration may be backward or forward:
Product Life Cycle
U.S. firms develop new products in the developed world for the domestic market, and then markets expand overseas. FDI takes place when product maturity hits and cost becomes an increasingly important consideration for the MNC.
Chapter Objective:
INTERNATIONAL FINANCIAL MANAGEMENT
Chapter Sixteen
16
This chapter discusses various issues associated with foreign direct investments by MNCs, which Third play a key role in shaping the nature of the Edition EUN / RESNICK emerging global economy.
Backward: e.g. a furniture maker buying a logging company. Forward: e.g. a U.S. auto maker buying a Japanese auto dealership.
16-11
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
116.8 149.9 148.8
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Why Do Firms Invest Overseas?
Trade Barriers Labour Market Imperfections Intangible Assets Vertical Integration Product Life Cycle Shareholder Diversification
Labour Market Costs Around the World (2001)
Persistent wage differentials across countries exist. This is one on the main reasons MNCs are making substantial FDIs in less developed nations.
Product Life Cycle
It should be noted that the Product Life Cycle theory was developed in the 1960s when the U.S. was the unquestioned leader in R&D and product innovation. Increasingly product innovations are taking place outside the United States as well, and new products are being introduced simultaneously in many advanced countries. Production facilities may be located in multiple countries from product inception.
16-7
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Labor Market Imperfections
Among all factor markets, the labor market is the least perfect.
New product
Maturing product
Standardized product exports
imports
New product
16-13
Maturing product
Standardized product
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.