[국제경영론] Foreign direct investment_ greenfield, brownfield investment, advantage of FDI, government policy instruments and FDI

국제경영론 International Business

Chapter. Foreign direct investment 

 

Foreign direct investment

• a firm invests directly in new facilities to produe and/or market in a foreign country
• once a firm undertakes FDI → it becomes a multinational enterprise
• two forms
  • greenfield investment : establishment of a wholly new operation in a foreign country
    • Definition: establishing new operational facilities from the ground up
    • Characteristics:
      • The investing company has total control over the setup, operations, and processes.
      • Often, it requires more time and capital since everything is built from scratch.
      • It allows customization of the facilities and operations based on the investor's specific needs.
      • Higher risk involved due to the lack of established structure or presence in the area.
    • Example:
      • GM in China;
      • Samsung in Vietnam;
      • Toyota in the United States.
  • brownfield investment : acquisition or merging with an existing firm in foregn country
    • Definition: acquiring or leasing existing facilities for new production
    • Characteristics:
      • Faster setup and commencement of operations since the facilities already exist.
      • Generally involves lower risk and cost compared to greenfield investments.
      • The investing company might have less control over the facility setup and might need to adapt to pre-existing structures.
      • There might be legacy issues related to the previous operations, employees, or structures
    • Example:
      • Alibaba in India (Paytm and BigBasket);
      • Tata Motors’ acquisition in Jaguar Land Rover
• exporting & licensing
  • Exporting involves producing goods at home and then shipping them to the receiving country for sale
  • Licensing involves granting a foreign entity(the licensee)the right to produce and sell the firm’s product in return for a royalty fee on every unit sold
  • why do firms prefer FDI either exporting or licensing?
    • to answer this question, we need to look at the limitations of exporting and licensing and the advantages of FDI
  • limitation of exporting
    • The viability 실행가능성 of an exporting strategy can be constrained by transportation costs and trade barriers
      • When transportation costs are high, exporting can be unprofitable
      • Foreign direct investment may be a response to actual or threatened trade barriers such as import tariffs or quotas
  • limitation of licensing
    • Internalization theory (also known as market imperfections 시장 불완전성) suggests that licensing has three major drawbacks.
      • it may result in firm’s giving away valuable technological know-how to potential foreign competitor
      • it does not give a firm tight control over manufacturing, marketing, strategy in a foreign country that may be required to maximize its profitability
      • it may be difficult if the firm’s competitive advantage is not amendable to licensing (if the firm has internal advantage→ licensing is not good idea)
• advantage of FDI
  • While exporting and licensing are viable strategies for international expansion
  • FDI offers firms more control, cost reduction benefits, and strategic positioning in foreign markets

 

pattern of FDI

• strategic behavior
  • have similar strategic behavior and undertake FDI around the same time
  • Knickerbocker explored the relationship between FDI and rivalry in oligopolistic industries (industries composed of a limited number of large firms)
    • Knickerbocker suggested that FDI flows are a reflection of strategic rivalry between firms in the global marketplace
  • This 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)
    • Firms will try to match other’s moves in different markets to try to hold each other in check.
• product life cycle
  • direct their investment activity toward certain location at certain stage in the product life cycle
  • Vernon argues that firms undertake FDI at particular stages in the life cycle of a product they have pioneered
  • Firms invest in other advanced countries when local demand in those countries grows large enough to support local production
  • Firms then shift production to low cost developing countries when product standardization and market saturation give rise to price competition and cost pressures

 

benefits and costs of FDI

• host (receiving) country
  • benefit
    • the resource transfer effect
      • FDI can make a positive contribution to a host economy by supplying capital, technology, and management resources that would otherwise not be available
        • 70년대 중국에 가장 많은 투자를 한 국가는 일본임
    • the employment effect
      • bring jobs to host country that would otherwise not be created there
        • (direct - amazon india and indirect - (supply chain )employment effect) (indirect가 더 큰 경우도 있음), 그리고 training도 진행하기 때문에 local worker 의 skill level도 높여줌, imcome - higher imcome을 줌 → living standard를 높임
    • the balance of payments effect (BOP)
      • 국제수지: 일정기간 동안 일국이 다른 나라와 행한 모든 경제적 거래를 체계적으로 분류한 것
      • 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
      • A current account surplus is usually favored over a deficit
      • FDI can help achieve a current account surplus
        • if the FDI is a substitute for imports of goods and services (이전에는 import 되던 것들이 대체되므로)
        • if the MNE uses a foreign subsidiary to export goods and services to other countries (production in host country and export in another country)
    • effects on competition and economic growth
      • FDI in the form of greenfield investment (시장 점유율을 차지하기 위해서)
        • increases the level of competition in a market (소비자의 제품 선택지 늘려줌)
        • drives down prices
        • improves the welfare of consumers
      • Increased competition can lead to
        • increased productivity growth
        • product and process innovation
        • greater economic growth (foreign firm과 경쟁해야 하므로 ,, 발전하고자 개선 할것임)
  • cost
    • possible adverse effects of FDI on competition within the host nation
      • Host governments 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
      • → As part of larger organization, the MNE could draw on funds generated elsewhere to subsidize costs in the local market
      • → Doing so could allow the MNE to drive indigenous competitors out of the market and create a monopoly position
    • adverse effects on balance of payments
      • two possible adverse effects
      • with initial capital inflows that come with FDI must be the subsequent outflow of capital as the foreign subsidiary repatriates earnings to its parent country
      • when a foreign subsidiary imports a substantial number of its inputs from abroad, there is a debit on current account of host country’s balance of payments
    • the perceived loss of national sovereignty and autonomy
      • telecommu, energy 등 중요한 부분이 FDI → policy making decision 등에 제약을 받을 수 없음 by foreign stakeholders …
      • Many host governments worry that FDI is accompanied by some loss of economic independence
        • 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 (source) country
  • benefit
    • the effect on home country’s balance of payments from the inward flow of foreign earnings
    • employment effect that arise from outward FDI (demand for home country export) bmw > some job may be create in home country as well
    • gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country toyota의 경우, 여러 시장에서 사업 영위 그리고 그를 통해 쌓은 노하우, 경험, 인사이트를 다시 본국으로 가져감, very good circulation for domestic market
  • cost
    • the balance of payment
      • The balance of payments suffers from the initial capital outflow required to finance the FDI → negetive effect on BOP
      • The current account is negatively affected if the purpose of the FDI is to serve the home market from a low-cost production location
      • The current account suffers if the FDI is a substitute for direct exports 중국에 수출하는 대신 중국 FDI에서 만들기로 했다면 →미국의 수출 감소로 이어짐
    • employment effects of outward FDI
      • if the home country is suffering from unemloyment, there may be concern about export of jobs 주로 노동력이 값싼 곳으로 이동, 실제로 2000s china 가 WTO에 가입하면서 미국에 있던 많은 제조 업체들이 중국으로 이동함 → 미국에서 대량 실업 발생 huge loss in manufacring job in us

 

government policy instruments and FDI

• FDI can be regulated by both home and host country
• government can implement policy to encourage or discourage FDI
• home country
  • encouraging outward FDI
    • Many nations now have government-backed insurance programs to cover major types of foreign investment risk
    • → This type of policy can encourage firms to undertake FDI in politically unstable nations
    • Many countries have eliminated the double taxation of foreign income
    • Many host nations have relaxed restrictions on inbound FDI
    • ex. OP, DSC, double taxation avoidance aggreement (DTAA) , 순서와 절차를 간소화하고 접근하기 쉽도록 해줌 (거점을 만들기도 함. 송도)
  • discouraging - resticting outward FDI
    • Virtually all invest or countries,including the UnitedStates,have exercised some control over outward FDI from time to time
    • Some countries manipulate tax rules to make it more favorable for firms to invest at home
    • Countries may restrict firms from investing in certain nations for political reasons (us against iran due to nuclear bomb, geopolitical issue, national security—government은 중요한 파트에 해외 회사가 진출하는 것을 막음 )
• host country
  • encouraging inward FDI
    • Governments offer incentives to foreign firms to invest in their countries
      • tax: (tax가 낮음 12.5 ..? 특히 pharmaceautical, technology 파트 굉장히 세금이낮음 → eu 국가에서 저 국가에 진출하는 것은 굉장히 매력적)
      • subsidy, support (IFEZ 인천 자유 무역 구역,,? 송도 무튼 여기 policy 가 있음 보조금 받고 세금 줄여주는 등)
      • 아니면 dubai처럼 인프라 시설을 좋게 하는것, 공항 설비 등 attracative environment 제공
    • Incentives are motivated by a desire to gain from the resource-transfer and employment effects of FDI, and to capture FDI away from other potential host countries
  • discouraging - restricting inward FDI
    • Ownership restraints:
      • exclude foreign firms from certain sectors on the grounds of national security or competition
      • based on a belief that local owners can help to maximize the resource transfer and employment benefits of FDI
    • Performance requirements:
      • used to maximize the benefits and minimize the costs of FDI for the host country
      • canada telecom 산업에 외국 회사가 들어오는 것을 제한함 to ensure decision making power
      • nigeria → local worker, domestic resource, service 를 사용하게 하는 등
      • tend to be more common in less developed countries than in advanced industrialized nations

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