Global Business Today Ninth Edition Chapter 8
Foreign Direct Investment
Chapter Outline
OPENING CASE: Foreign Direct Investment in Nigeria
INTRODUCTION
FOREIGN DIRECT INVESTMENT IN THE WORLD ECONOMY
Trends in FDI
The Direction of FDI
Country Focus: Foreign Direct Investment in China
The Source of FDI
The Form of FDI: Acquisitions versus Greenfield Investments
THEORIES OF FOREIGN DIRECT INVESTMENT
Why Foreign Direct Investment?
Management Focus: Foreign Direct Investment by Cemex
The Pattern of Foreign Direct Investment
The Eclectic Paradigm
POLITICAL IDEOLOGY AND FOREIGN DIRECT INVESTMENT
The Radical View
The Free Market View
Pragmatic Nationalism
Shifting Ideology
Management Focus: DP World and the United States
BENEFITS AND COSTS OF FDI
Host Country Benefits
Host Country Costs
Home Country Benefits
Home Country Costs
International Trade Theory and FDI
GOVERNMENT POLICY INSTRUMENTS AND FDI
Home Country Policies
Global Business Today Ninth Edition Chapter 8
Host Country Policies
International Institutions and the Liberalization of FDI
FOCUS ON MANAGERIAL IMPLICATIONS
FDI and Government Policy
The Theory of FDI
Government Policy
SUMMARY
CRITICAL THINKING AND DISCUSSION QUESTIONS
CLOSING CASE: Foreign Retailers in India
Learning Objectives
1. Recognize current trends regarding foreign direct investment (FDI) in the world economy.
2. Explain the different theories of FDI.
3. Understand how political ideology shapes a government’s attitudes towards FDI.
4. Describe the benefits and costs of FDI to home and host countries.
5. Explain the range of policy instruments that governments use to influence FDI.
6. Identify the implications for management practice of the theory and government policies associated
with FDI.
Chapter Summary
This chapter focuses on the topic of foreign direct investment (FDI). FDI occurs when a firm invests
directly in new facilities to produce and/or market a product in a foreign country. At the outset, the
chapter discusses the growth in FDI, particularly by medium-sized and small firms. The theoretical
underpinnings of FDI are discussed, which describe under what circumstances it is advantageous for a
firm to invest in production facilities in a foreign country. The chapter also addresses the different
policies that governments have toward foreign direct investment. Some governments are opposed to
FDI and some governments encourage it. Three specific ideologies of FDI are discussed, including
the radical view, the free market view, and pragmatic nationalism. The chapter also provides a
discussion of the costs and benefits of FDI from the perspective of both the home country and the host
country involved. The chapter concludes with a review of the policy instruments that governments use
to regulate FDI activity by international firms.
Opening Case: Foreign Direct Investment in Nigeria
Global Business Today Ninth Edition Chapter 8
Summary
The opening case explores foreign direct investment in Nigeria. For years, Nigeria struggled
economically, but recently this trend has started to change thanks to political and economic reform
policies instituted in the 2000s. Today, the country is moving toward a more stable, democratic
system, corruption is down, and investments in infrastructure and transportation are beginning to pay
off. Companies like GE and Proctor & Gamble have made large investments in the country, hoping to
capitalize on its large market potential. Discussion of the case can revolve around the following
questions:
Suggested Discussion Questions
QUESTION 1: Discuss the opportunities for foreign direct investment in Nigeria. What are the
benefits of establishing operations in the country? Do you see any drawbacks?
QUESTION 2: Reflect on the political and economic reforms that have recently gone into effect in
Nigeria. Why are reforms like these so important to the future economic success of the country? How
does foreign investment into the country benefit Nigeria?
Global Business Today Ninth Edition Chapter 8
21/jumia-africas-amazon-dot-com-takes-cash-and-delivers-by-motorbike} and
{http://www.businessweek.com/news/2014-09-29/nigeria-plans-airline-to-profit-from-2-billion-
aviation-program}.
Chapter Outline with Lecture Notes, Video Notes, and Teaching Tips
INTRODUCTION
A) This chapter is concerned with the phenomenon of foreign direct investment (FDI). Foreign direct
investment occurs when a firm invests directly in new facilities to produce and/or market in a foreign
country. Once a firm undertakes FDI it becomes a multinational enterprise.
Teaching Tip: Fortune magazine publishes a list of the 500 largest global corporations in the world.
For more information, go to {http://fortune.com/rankings/}. The article also breaks down the list by
country, and is an excellent resource for discussing the role of large multinationals in the world
economy.
B) FDI takes on two main forms; the first is a greenfield investment, which involves the
establishment of a wholly new operation in a foreign country. The second involves acquiring or
merging with an existing firm in the foreign country. There are three types of acquisitions: minority
(10 percent to 49 percent stake), majority 50 percent to 99 percent), or full (100 percent).
FOREIGN DIRECT INVESTMENT IN THE WORLD ECONOMY
A) When discussing foreign direct investment, it is important to distinguish between the flow and the
stock of foreign direct investment. The flow of FDI refers to the amount of FDI undertaken over a
given time period (normally a year). The stock of FDI refers to the total accumulated value of
foreign-owned assets at a given time. Outflows of FDI, meaning the flow of FDI out of a country,
and inflows of FDI, meaning the flow of FDI into a country are also discussed.
Trends in FDI
B) Over the past 30 years there has been a marked increase in both the flow and stock of FDI in the
world economy. The significant growth in FDI has both to do with the political economy of trade as
outlined in the previous chapter and the political and economic changes that have been taking place in
developing countries.
C) FDI has grown more rapidly than world trade and world output for three reasons. First, firms still
fear the threat of protectionism. Second, the general shift toward democratic political institutions and
free market economies has encouraged FDI. Third, the globalization of the world economy is having a
positive impact on the volume of FDI as firms undertake FDI to ensure they have a significant
presence in many regions of the world.
Video Note: To expand this discussion, consider the video in the International Business Library on
Pinterest (http://www.pinterest.com/mheibvideos/) Marriott Plans Asian Hotel Expansion.
Global Business Today Ninth Edition Chapter 8
The Direction of FDI
D) Historically, most FDI has been directed at the developed nations of the world, with the United
States being a favorite target. FDI inflows have remained high during the 2000s for the United States,
with $167 billion in 2012. FDI inflows are also high to the European Union. Inward investment into
the European Union was $276 billion in 2012.
E) South, East, and Southeast Asia, and particularly China, are now seeing an increase of FDI inflows.
China attracted $121 billion in FDI from 2012. Latin America is also emerging as an important region
for FDI. Inward investment to the region was about $244 billion in 2012.
F) Because of the region’s political unrest, conflict, and changing economic policy, Africa is the
recipient of the smallest amount of inward investment with just $50 billion in 2012. China is a major
investor in Africa, particularly in extraction industries.
Teaching Tip: The United Nations Conference on Trade and Development (UNCTAD) provides
extensive statistics on the flows of foreign direct investment and the operations of transnational
companies. For more information, go to
{http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx?sRF_ActivePath=P,5,27&sRF_Expand
ed=,P,5,27&sCS_ChosenLang=en}.
Country Focus: Foreign Direct Investment in China
Summary
This feature explores investment opportunities in China. In the late 1970s, China opened its doors to
foreign investors. By 2011, China attracted a record $124 billion of FDI, and now claims the position
of being second only to the United States in terms of attracting FDI. China’s large population is a
magnet for many companies and because high tariffs make it difficult to export to the Chinese market,
firms frequently turn to foreign direct investment. However, many companies have found it difficult to
conduct business in China, and in recent years investment rates have slowed. In response, the Chinese
government, hoping to continue to attract foreign companies has established a number of incentives
for would-be investors. The following questions can be used in a discussion.
1. Consider the challenges involved with investing in China. How does China’s political position and
economic situation affect its ability to attract foreign direct investment?
2. Discuss China’s efforts to encourage investment in its underdeveloped areas. What effect will
Global Business Today Ninth Edition Chapter 8
investment have on these areas? How can firms prepare for the unique challenges of operating in
these areas?
Lecture Note: Despite the strong interest in China as an investment destination, some believe that
China is still unstable, and not yet ready to handle the responsibilities of being a global superpower.
For more information, go to {http://www.businessweek.com/articles/2012-09-27/china-what-kind-of–
superpower} and {http://www.businessweek.com/ap/2014-10-28/china-wants-better-legal-system-
under-party-rule}.
Lecture Note: While China remains a popular location for foreign investment
{http://www.bbc.com/news/business-23339706}, questions about the country’s infrastructure have
risen recently. For more details, go to {http://www.businessweek.com/articles/2012-09-27/the-cracks-
in-chinas-shiny-buildings}.
Video Note: The videos in the International Business Library on Pinterest
(http://www.pinterest.com/mheibvideos/) China Rising Part 1: The Boom – China’s Rising Economy
fits in well with this feature and U.S. China Explore Deeper Ties as Partners, Contenders explores the
deepening relationship between the United States and China.
The Source of FDI
G) Not only has the flow of FDI been accelerating, but its composition has also been changing. For
most of the period after World War II, the United States was by far the largest source country for FDI.
Other important source countries include the United Kingdom, the Netherlands, France, Germany, and
Japan. Together, these countries accounted for 60 percent of all FDI outflows from 1998 to 2012.
Chinese firms have also emerged as major foreign investors accounting for $84 billion in 2012.
The Form of FDI: Acquisitions versus Greenfield Investments
H) The majority of cross-border investment is in the form of mergers and acquisitions rather than
greenfield investments. Firms prefer to acquire existing assets rather than undertake greenfield
investments because (1) mergers and acquisitions are quicker to execute than greenfield investments;
(2) it is easier and perhaps less risky for a firm to acquire desired assets than build them from the
ground up; and (3) firms believe that they can increase the efficiency of an acquired unit by
transferring capital, technology, or management skills.
Note: The iGlobe Graduate Students Recount Experiences with Globalization explores the effects of
globalization, including investment by multinational firms from the perspective of several students from
different countries. The iGlobe ties in well with a discussion of what investment means to countries, and who
wins and who loses.
Global Business Today Ninth Edition Chapter 8
THEORIES OF FOREIGN DIRECT INVESTMENT
A) In this section of the text, several theories of foreign direct investments are discussed. These
theories attempt to explain the observed pattern of foreign direct investment flows.
Why Foreign Direct Investment?
B) Why do so many firms apparently prefer FDI to either exporting (producing goods at home and
then shipping them to the receiving country for sale) or licensing (granting a foreign entity the right to
produce and sell the firm’s product in return for a royalty fee on every unit that the foreign entity
sells)? The answer lies in the limitations of these methods for exploiting foreign market opportunities.
Limitations of Exporting
C) The viability of an exporting strategy is often constrained by transportation costs and trade barriers.
Much foreign direct investment is undertaken as a response to actual or threatened trade barriers such
as import tariffs or quotas.
Limitations of Licensing
D) There is a branch of economic theory known as internalization theory (also known as the market
imperfections approach) that seeks to explain why firms often prefer foreign direct investment to
licensing as a strategy for entering foreign markets. According to internationalization theory, licensing
has three major drawbacks as a strategy for exploiting foreign market opportunities.
(1) First, licensing may result in a firm’s giving away valuable technological know-how to a
potential foreign competitor.
(2) Second, licensing does not give a firm the tight control over manufacturing, marketing, and
strategy in a foreign country that may be required to maximize its profitability.
(3) Third, a problem arises with licensing when the firm’s competitive advantage is based not
so much on its products as on the management, marketing, and manufacturing capabilities that
produce those products. Such capabilities are often not amenable to licensing.
E) So, when one or more of the following conditions holds, markets fail as a mechanism for selling
know-how and FDI is more profitable than licensing. (i) when the firm has valuable know-how that
cannot be adequately protected by a licensing contract, (ii) when the firm needs tight control over a
foreign entity to maximize its market share and earnings in that country, and (iii) when a firm’s skills
and know-how are not amenable to licensing.
Advantages of Foreign Direct Investment
F) It follows from the above discussion that a firm will favor FDI over exporting as an entry strategy
when transportation costs or trade barriers make exporting unattractive. Furthermore, the firm will
favor FDI over licensing when it wishes to maintain control over its technological know-how, or over
Global Business Today Ninth Edition Chapter 8
its operations and business strategy, or when the firm’s capabilities are simply not amenable to
licensing.
Management Focus: Foreign Direct Investment by Cemex
Summary
This feature 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 the needs of developing companies, 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. The
following questions can be used in a discussion.
1. Reflect on the decision made by Cemex with regard to international expansion. Why do you think
the company chose to invest directly in other countries rather than export? Why was it more attractive
for Cemex to acquire companies in foreign markets rather than establish its own operations?
2. What benefits does Cemex bring to host countries? How have the company’s investments in
foreign markets contributed to its ability to be a leader in the global cement industry?
Teaching Tip: To learn more about Cemex’s foreign operations, go to {http://www.cemex.com/}.
Global Business Today Ninth Edition Chapter 8
Lecture Note: To extend this discussion, consider {http://www.businessweek.com/news/2014-04-
30/cemex-loss-widens-as-mexico-construction-industry-slump-lingers}.
The Pattern of Foreign Direct Investment
G) Observation suggests that firms in the same industry often undertake foreign direct investment
around the same time and tend to direct their investment activities towards certain locations.
Strategic Behavior
H) One theory used to explain foreign direct investment patterns is based on the idea that FDI flows
are a reflection of strategic rivalry between firms in the global marketplace. Knickerbocker looked at
the relationship between FDI and rivalry in oligopolistic industries (industries composed of a limited
number of large firms). A critical competitive feature of such industries is the interdependence of the
major players: what one firm does can have an immediate impact on the major competitors forcing a
response in kind.
I) Knickerbocker’s 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.)
The Eclectic Paradigm
J) The eclectic paradigm has been championed by the British economist John Dunning. Dunning
argues that in addition to the various factors discussed above, 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) are also of considerable importance in
explaining both the rationale for and the direction of foreign direct investment.
POLITICAL IDEOLOGY AND FOREIGN DIRECT INVESTMENT
A) Historically, ideology toward FDI has ranged from a radical stance that is hostile to all FDI to the
non-interventionist principle of free market economies. Between these two extremes is an approach
that might be called pragmatic nationalism.
The Radical View
B) The radical view tracts its roots to Marxist political and economic theory. Radical writers argue
that the multinational enterprise (MNE) is an instrument of imperialist domination. They see MNEs as
a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home
countries. By the early 1990s, however, the radical position was in retreat almost everywhere because
of 1) the collapse of communism in Eastern Europe; 2) the generally abysmal economic performance
of those countries that embraced the radical position, and a growing belief by many of these countries
that, contrary to the radical position, FDI can be an important source of technology and jobs and can
Global Business Today Ninth Edition Chapter 8
stimulate economic growth; and 3) the strong economic performance of developing countries that
embraced capitalism rather than ideology.
The Free Market View
C) The free market view argues that international production should be distributed among countries
according to the theory of comparative advantage. The free market view has been embraced by a
number of advanced and developing nations, including the United States and Britain.
Pragmatic Nationalism
D) The pragmatic nationalist view is that FDI has both benefits – such as inflows of capital,
technology, skills and jobs – and costs, such as repatriation of profits to the home country and a
negative balance of payments effect.
E) Recognizing this, countries adopting a pragmatic stance pursue policies designed to maximize the
national benefits and minimize the national costs. According to this view, FDI should be allowed only
if the benefits outweigh the costs.
Shifting Ideology
F) In recent years the center of gravity on the ideological spectrum has shifted strongly toward the free
market stance creating a surge in FDI. However, some countries such as Venezuela and Bolivia have
become increasingly hostile to FDI. The Management Focus feature on DP World provides more
insight to this countertrend.
Management Focus: DP World and the United States
Summary
This feature explores the reaction to the bid by DP World, a Dubai-based ports operator, to acquire
P&O, a British firm that runs a network of global marine terminals. An acquisition of P&O would
give DP World management of six U.S. ports. While the Bush administration claimed the acquisition
posed no threat to national security, several prominent U.S. Senators raised concerns about the
acquisition. Ultimately, DP World pulled out of the deal, but stated that it would look for alternative
ways to enter the U.S. market, beginning with an initial public offering in 2007. The following
questions can be used in a discussion.
Suggested Discussion Questions
1. Do you agree with the senators who raised concerns about the DP World deal? Why or why not?
Would your response be different if DP World were a British firm?
Discussion Points: This issue will probably generate significant debate among students. At the heart
of the issue is whether a company, because of its country of origin, should be denied ownership of
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152
something that could be important to a nation’s national security. Some students will probably argue
that the United States was unjustified in its reaction to the deal, that DP World has a long history of
American associations. Students taking this perspective will probably suggest that the United States is
being prejudiced against the company simply because of its nationality. Other students however, will
probably claim that DP World’s role in with American companies to date, has not involved ownership
of ports that could be important to the country’s national security. Students in this camp will probably
argue that the ports should be owned by American companies or at least companies from countries that
are allies of the United States in order to preserve national security, but definitely not a state-owned
company from the Middle East. The implication here is that ownership of the ports would effectively
transfer to a foreign government.
2. DP World has vowed to enter the United States market in some other way. Why is the U.S. market
so important to DP World? What do you think the response of the government might be to another
attempt by DP World?
Teaching Tip: For more information on the company and its recent developments, go to
{http://www.dpworld.ae/}.
Video Note: To extend this discussion, consider {http://www.businessweek.com/videos/2014-03-
28/dp-world-chairman-sees-latin-america-africa-growth}.
BENEFITS AND COSTS OF FDI
A) Most governments take a pragmatic nationalist approach to FDI, and weigh its costs and benefits
when making policy decisions. The costs and benefits of FDI differ according to whether it is
considered from a host country perspective or from a home country perspective.
Host Country Benefits
B) The main benefits of inward FDI for a host country are: the resource transfer effect, the
employment effect, the balance of payments effect, and effects on competition and economic growth.
Resource-Transfer Effects
C) FDI can make a positive contribution to a host economy by supplying capital, technology, and
management resources that would otherwise not be available.
Employment Effects
Global Business Today Ninth Edition Chapter 8
D) The beneficial employment effect claimed for FDI is that FDI brings jobs to a host country that
would otherwise not be created there.
Balance-of-Payments Effects
E) The effect of FDI on a country’s balance–of-payments accounts is an important policy issue for
most host governments. 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.
F) Governments typically prefer to see a current account surplus than a deficit. There are two ways in
which FDI can help a country to achieve this goal. First, if the FDI is a substitute for imports of goods
and services, the effect can be to improve the current account of the host country’s balance of
payments. A second potential benefit arises when the MNE uses a foreign subsidiary to export goods
and services to other countries.
Effect on Competition and Economic Growth
G) When FDI takes the form of greenfield investment, the number of players in a market increases
giving consumers more choice. This can increase the level of competition in a market, driving down
prices and improving the welfare of consumers. In the long term, increased competition can lead to
increased productivity growth, product and process innovation, and greater economic growth.
Video Note: To expand this discussion, consider the video in the International Business Library on
Pinterest (http://www.pinterest.com/mheibvideos/) Mercedes-Benz Questioned in China Pricing
Probe.
Host Country Costs
H) Three main costs of inward FDI concern host countries; the possible adverse effects of FDI on
competition within the host nation, adverse effects on the balance of payments, and the perceived loss
of national sovereignty and autonomy.
Adverse Effects on Competition
I) Host governments sometimes 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.
Adverse Effects on the Balance of Payments
J) The possible adverse effects of FDI on a host country’s balance-of-payments position are twofold.
First, set against the initial capital inflows that come with FDI must be the subsequent outflow of
capital as the foreign subsidiary repatriates earnings to its parent country. A second concern arises
when a foreign subsidiary imports a substantial number of its inputs from abroad, which results in a
Global Business Today Ninth Edition Chapter 8
debit on the current account of the host country’s balance of payments.
National Sovereignty and Autonomy
K) Many host governments worry that FDI is accompanied by some loss of economic independence.
The concern is that 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 Country Benefits
L) The benefits of FDI to the home country arise from three sources. First, the capital account of the
home country’s balance of payments benefits from the inward flow of foreign earnings. Second,
benefits to the home country from outward FDI arise from employment effects. Third, benefits arise
when the home country MNE learns valuable skills from its exposure to foreign markets that can
subsequently be transferred back to the home country.
Home Country Costs
M) The most important concerns center around the balance-of-payments and employment effects of
outward FDI. With regard to employment effects, the most serious concerns arise when FDI is seen as
a substitute for domestic production.
Video Note: There are two videos in the International Business Library on Pinterest
(http://www.pinterest.com/mheibvideos/) that explore the costs and benefits of foreign direct
investment on countries. The first is Peru Nurtures Growth Amid Economic Uncertainty and the
second is Ethiopia’s Abundant Farming Investments Leave Many Still Hungry.
International Trade Theory and FDI
N) When assessing the costs and benefits of FDI to the home country, keep in mind the lessons of
international trade theory (chapter 5). International trade theory tells us that home country concerns
about the negative economic effects of offshore production (FDI undertaken to serve the home
market) may be misplaced.
GOVERNMENT POLICY INSTRUMENTS AND FDI
A) The costs and benefits of the FDI from the perspective of both home country and host country have
been reviewed. Next, the policy instruments that home countries and host countries use to regulate
FDI are addressed.
Home Country Policies
B) With their choice of policies, home countries can both encourage and restrict FDI by local firms.
Global Business Today Ninth Edition Chapter 8
Encouraging Outward FDI
C) Many investor nations now have government-backed insurance programs to cover major types of
foreign investment risk.
Restricting Outward FDI
D) Virtually all investor countries, including the United States, have exercised some control over
outward FDI from time to time.
Host Country Policies
E) Host countries adopt policies designed both to restrict and to encourage inward FDI.
Encouraging Inward FDI
F) It is increasingly common for governments to offer incentives to foreign firms to invest in their
countries.
G) Incentives are motivated by a desire to gain from the resource-transfer and employment effects of
FDI. They are also motivated by a desire to capture FDI away from other potential host countries.
Restricting Inward FDI
H) Host governments use a wide range of controls to restrict FDI. The two most common, however,
are ownership restraints and performance requirements.
I) The rationale underlying ownership restraints seems to be twofold. First, foreign firms are often
excluded from certain sectors on the grounds of national security or competition. Second, ownership
restraints seem to be based on a belief that local owners can help to maximize the resource transfer and
employment benefits of FDI for the host country.
International Institutions and the Liberalization of FDI
J) Until recently there has been no consistent involvement by multinational institutions in the
governing of FDI. With the formation of the World Trade Organization in 1995, this changed. The
WTO is more involved in regulations governing FDI.
FOCUS ON MANAGERIAL IMPLICATIONS
FDI and Government Policy
A) There are several implications for managers. The text explores the implications of theory, and then
the implications of government policy.
Global Business Today Ninth Edition Chapter 8
The Theory of FDI
B) The implications of the theories of FDI for business practice are straightforward. First, the
location-specific advantages argument associated with John Dunning helps explain the direction of
FDI. However, the location-specific advantages argument does not explain why firms prefer FDI to
licensing or to exporting. In this regard, from both an explanatory and a business perspective, perhaps
the most useful theories are those that focus on the limitations of exporting and licensing.
Government Policy
C) A host government’s attitude toward FDI should be an important variable in decisions about where
to locate foreign production facilities and where to make a foreign direct investment.
Teaching Tip: The World Bank is an excellent resource for exploring the potential of a country for
investment. Students can also access additional information on countries by typing in “doing
business” into the home page search box. The site is available at {http://rru.worldbank.org/}.
Critical Thinking and Discussion Questions
1. In 2008, inward FDI accounted for some 63.7 percent of gross capital formation in Ireland, but only
4.1 percent in Japan (gross capital formation refers to investments in fixed assets such as factories,
warehouses, and retail stores). What do you think explains this difference in FDI inflows into the two
countries?
2. Compare and contrast these explanations of FDI: internalization theory and Knickerbocker’s theory
of FDI. Which theory do you think offers the best explanation of the historical pattern of horizontal
FDI? Why?
© 2016 by McGraw-Hill Education.
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157
3. What are the strengths of the eclectic theory of FDI? Can you see any shortcomings? How does the
eclectic theory inform management practices?
4. Reread the Management Focus on Cemex and then answer the following questions:
a) Which theoretical explanation, or explanations, of FDI best explains Cemex’s FDI?
b) 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?
c) Cemex has a strong preference for acquisitions over greenfield ventures as an entry mode. Why?
5. You are the international manager of a U.S. business that has just invented a revolutionary new
personal computer that can perform the same functions as PCs, but costs only half as much to
manufacture. Your CEO has asked you to decide how to expand into the European Union market.
Your options are (a) to export from the United States, (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.
Global Business Today Ninth Edition Chapter 8
Closing Case: Foreign Retailers in India
Summary
The closing case explores India’s retail sector and the impact foreign investors have had on its
development. India’s retail sector is highly fragmented consisting mainly of small Mom and Pop
establishments. There has been a push to open the sector to large foreign investors like Carrefour,
Tesco and Wal-Mart, but resistance to this has also been strong. So far, the country has permitted
foreign investors to participate in wholesaling, but at the moment still restricts entry at the retail level.
Discussion of this case can revolve around the following questions:
QUESTION 1: Why do you think that the Indian retail sector is so fragmented?
QUESTION 2: What are the potential benefits to India of entry by foreign retail establishments?
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document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
159
ANSWER 2: Students will probably agree that investments by mega retailers would be both
beneficial and harmful to India. Wal-Mart, Tesco, and Carrefour all rely on highly efficient
distribution systems. For this type of system to work in India, the companies will probably have to
make substantial investments in infrastructure, something that would benefit the country. The
companies would also bring new jobs, training, and technology to the country. Suppliers could also
benefit from the presence of the retailers and the steady demand they would create. But, because the
retail sector employs some 34 million people, many are concerned that the presence of large mega
stores like Tesco, Wal-Mart, and Carrefour could eliminate their jobs.
QUESTION 3: Who stands to lose as a result of foreign entry into the India retail sector?
QUESTION 4: Why do you think reform of FDI regulations in India has been so difficult?
Continuous Case Concept
In 2012, Nissan announced plans to increase its investment in Thailand. The company, which plans to
spend $358 million to open a new plant in the country, is hoping the additional capacity the new plant
will provide will allow it to increase its market share in the country from 9 percent in 2011 to about 15
percent by 2016. In recent years, Thailand has worked to liberalize its auto industry and now claims to
Global Business Today Ninth Edition Chapter 8
be the Detroit of the East. Auto sales in the country are expected to hit 1 million vehicles in 2012,
making it the biggest market in Southeast Asia.
• Ask students to predict what changes in the global auto industry might occur in the next decade
as a result of Thailand’s position as a regional auto hub. How might the patterns of FDI shift?
• Then, ask students to consider which theory best explains why companies like Nissan are
attracted to Thailand.
• Finally, ask students to identify the benefits for Thailand of inward FDI in the auto industry.
How will Nissan’s investment impact the country? Does Nissan’s investment have any
drawbacks for Thailand?
The first and third parts of this exercise can be used as an introduction to the chapter material, or
together with the second question as a conclusion to the chapter. The second question can also be used
by itself during the discussion of how trade theories help us understand trade patterns.
globalEDGE Exercises
The resources for each exercise can be easily located by using the search box at the top of the
globalEDGE website at http://globalEDGE.msu.edu
Exercise 1
Search phrase: largest transnational corporations
Resource Name: UNCTAD: Largest Transnational Corporations
Website: http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Annex-Tables.aspx
globalEDGE Category: Rankings
Additional Info:
The ranking of the largest transnational corporations in the world is an annex to the annual World
Investment Report published by the United Nations Conference on Trade and Development
(UNCTAD). There are two separate rankings, one for financial corporations and another one for the
non-financial corporations.
Exercise 2
Search phrase: Multilateral Investment Guarantee Agency
Resource Name: Multilateral Investment Guarantee Agency (MIGA)
Website: http://www.miga.org/
globalEDGE Category: Organizations
Additional Info:
Global Business Today Ninth Edition Chapter 8
The Water and Wastewater Sector Brief can be reached in two ways: (1) By visiting the Sectors
section, choosing Infrastructure, and then clicking on the Water Sector Brief under that section. (2)
Visiting the Resources section, choosing Briefs and Case Studies on the left menu, and then clicking
on the Water link.
Additional Readings and Sources of Information
China’s Rising Wages and the Made in the USA Revival
http://www.businessweek.com/articles/2014-10-23/chinas-rising-wages-and-the-made-in-the-usa-
revival
China Lists Industries to Free-Up in Shanghai Zone
http://www.businessweek.com/ap/2014-09-28/china-lists-industries-to-free-up-in-shanghai-zone
African Countries Recalculate GDP, Find Much Higher Numbers
http://www.businessweek.com/articles/2014-10-09/african-countries-recalculate-gdp-find-much-
higher-numbers
Nigeria Cocoa Processors Face Cost Barriers to EU Exports
http://www.businessweek.com/news/2014-10-21/nigeria-cocoa-processors-face-cost-barriers-to–eu–
exports
Daimler Invests $850 Million in India, Opens New Factory
http://www.businessweek.com/ap/2012-04-18/daimler-invests-850m-in-india-opens-new-factory
Volkswagen Opens $27M California Testing Facility
http://www.businessweek.com/ap/2012-08-20/volkswagen-opens-27m-california-testing-facility
Top 20 Countries for Foreign Investment
http://www.thinkadvisor.com/2013/03/19/top-20-countries-for-foreign-investment
Britain Sliding in Foreign Investment
http://www.businessweek.com/globalbiz/content/feb2010/gb20100224_156946.htm
Is Vietnam Finally Ready for Foreign Investors?
http://www.businessweek.com/magazine/content/10_26/b4184012382639.htm
Turkmenistan: Investment for Thrill Seekers
http://www.businessweek.com/globalbiz/content/feb2010/gb2010025_143854.htm
Tesco, Tata Target Indian Grocery Market
http://www.businessweek.com/globalbiz/content/aug2008/gb20080813_378571.htm