Chapter Seven
Foreign Direct
Investment
Learning Objectives
After studying this chapter, you should be able to:
1. Describe the worldwide pattern of foreign direct investment (FDI).
2. Summarize each theory that attempts to explain why FDI occurs.
3. Outline the important management issues in the FDI decision.
4. Explain why governments intervene in FDI.
5. Describe the policy instruments governments use to promote and
restrict FDI.
A Look Back
A Look at This Chapter
A Look Ahead
Chapter 6 explained
the political economy
of trade in goods
and services. We
explored the motives
and instruments of
government intervention.
We also examined the
global trading system
and how it promotes free
trade.
This chapter examines another
significant form of international business:
foreign direct investment (FDI). We
explore the patterns of FDI and the
theories on which it is based. We
also learn why and how governments
intervene in FDI activity.
Chapter 8 explores the trend toward
greater regional integration of national
economies. We explore the benefits
of closer economic cooperation and
examine prominent regional trading
blocs around the world.
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206
Chapter7 • ForeignDireCtinvestment 207
Das Auto
FRANKFURT, Germany—The Volkswagen Group (www.vw.com) owns 10 of the most
prestigious and best-known automotive brands in the world, including Audi, Bentley, Bugatti,
Lamborghini, Porsche, and Volkswagen. From its 48 production facilities worldwide, the
company produces and sells around eight million cars annually to more than 150 countries.
Volkswagen is the top-selling manufacturer in South America and China. It has been active
in China since 1985 and the country
accounts for around 30 percent of VW’s
total sales. Volkswagen is building four
new assembly plants in China, one being
the first ever automobile plant in western
China. Shown here is a worker on an
assembly line at a Volkswagen plant in
China.
Volkswagen also has ambitious
goals for its U.S. expansion. It is adapting designs to domestic tastes, cutting
prices, and adding inexpensive production capacity. The company employs
more than 2,000 people at its state-ofthe-art assembly plant in Chattanooga,
Tennessee. Volkswagen pays wages
and benefits at the plant equal to $27
an hour, whereas Japanese auto-makers
in the United States pay $50 an hour
and General Motors pays around $60
an hour. The company uses a modular strategy in production that lets it
use the same key components in 16 different vehicles and seven million units across
its brands. The strategy should shave $500 off the cost of each car by cutting product
development and parts costs by 20 percent and reducing production time by 30 percent.
Volkswagen, like companies everywhere, received plenty of help in getting where it
is today. Until recently, Volkswagen received special protection from its own legislation
known as the VW Law. The law gave the German state of Lower Saxony, which owns
20.1 percent of Volkswagen, the power to block any takeover attempt that threatened local jobs and the economy. Volkswagen’s special treatment lies in the close ties between
government and management in Germany and its importance to the nation’s economy,
where it employs tens of thousands of people. As you read this chapter, consider all the
issues that affect the foreign investment decisions of companies.1
Source: © Imaginechina/Corbis
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part3 • internationaltraDeanDinvestment
Many early trade theories were created at a time when most production factors (such as labor,
financial capital, capital equipment, and land or natural resources) either could not be moved or
could not be moved easily across national borders. But today, all those production factors except
land are internationally mobile and flow across borders to wherever they are needed. Financial
capital is readily available from international financial institutions to finance corporate expansion, and whole factories can be picked up and moved to another country. Even labor is more
mobile than in years past, although many barriers restrict the complete mobility of labor.
International flows of capital are at the core of foreign direct investment (FDI)—the
purchase of physical assets or a significant amount of the ownership (stock) of a company in another country in order to gain a measure of management control. But there is wide disagreement
on what exactly constitutes FDI. Nations set different thresholds at which they classify an international capital flow as FDI. The U.S. Commerce Department sets the threshold at 10 percent of
stock ownership in a company abroad, but most other governments set it at anywhere from 10
to 25 percent. By contrast, an investment that does not involve obtaining a degree of control in a
company is called a portfolio investment.
In this chapter, we examine the importance of FDI to the operations of international companies. We begin by exploring the growth of FDI in recent years and investigating its sources and
destinations. We then look at several theories that attempt to explain FDI flows. Next, we turn
our attention to several important management issues that arise in most decisions about whether
a company should undertake FDI. This chapter closes by discussing the reasons why governments encourage or restrict FDI and the methods they use to accomplish these goals.
foreign direct investment
(FDI)
Purchase of physical assets
or a significant amount of the
ownership (stock) of a company
in another country to gain a
measure of management control.
portfolio investment
Investment that does not involve
obtaining a degree of control in a
company.
Pattern of Foreign Direct Investment
Just as international trade displays a distinct pattern (see Chapter 5), so too does FDI. In this
section, we first look at the factors that have propelled growth in FDI over the past decade. We
then turn our attention to the destinations and sources of FDI.
Ups and Downs of FDI
FDI inflows grew around 20 percent per year in the first half of the 1990s and expanded about
40 percent per year in the second half of the decade. As shown in Figure 7.1, global FDI inflows
averaged $548 billion annually between 1994 and 1999. FDI inflows peaked at around $1.4 trillion in 2000 and then slowed. Strong economic performance and high corporate profits in many
countries lifted FDI inflows in 2004, 2005, 2006, and reached an all-time record of more than
$1.9 trillion in 2007.
Global financial crises and slower global economic growth meant declining FDI inflows in
2008 and 2009. FDI inflows climbed again in 2010 and 2011 but then fell back to $1.35 trillion
Figure 7.1
Yearly Foreign
Direct Investment
Inflows
Source: Based on World
Investment Report (Geneva,
Switzerland: UNCTAD), various
years.
$ billions
2000
* = Estimated
1500
1000
500
0
'94–'99 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
(ave.)
Year
2011 2012 2013 2014 2015* 2016*
Chapter7 • ForeignDireCtinvestment 209
in 2012 due to a fragile global economy and uncertain government policies. FDI inflows are
expected to rise to $1.6 trillion in 2014 and $1.8 trillion in 2015 as the world emerges from
recession. Significant uncertainty surrounds medium-term FDI flows, but the long-term trend
points toward greater FDI inflows worldwide. The two main drivers of FDI flows are globalization and international mergers and acquisitions.
GLOBALIzATIOn Recall from Chapter 6 that barriers to trade were not being reduced years ago,
and new, creative barriers seemed to be popping up in many nations. This presented a problem
for companies that were trying to export their products to markets around the world. A wave of
FDI began as many companies entered promising markets to get around growing trade barriers.
Then the Uruguay Round of GATT negotiations created renewed determination to further reduce
barriers to trade. As countries lowered their trade barriers, companies realized that they could
now produce in the most efficient and productive locations and simply export to their markets
worldwide. This set off another wave of FDI flows into low-cost emerging markets. The forces
behind globalization are, therefore, part of the reason for long-term growth in FDI.
Increasing globalization is also causing a growing number of international companies from
emerging markets to undertake FDI. For example, companies from Taiwan began investing
heavily in other nations two decades ago. Acer (www.acer.com), headquartered in Singapore but
founded in Taiwan, manufactures personal computers and computer components. Just 20 years
after it opened for business, Acer had spawned 10 subsidiaries worldwide and had become an
industry player in many emerging markets.
MerGerS AnD ACqUISITIOnS The number of mergers and acquisitions (M&As) and their
rising values over time also underlie long-term growth in FDI. In fact, cross-border M&As
are the main vehicle through which companies undertake FDI. Companies based in developed
nations have historically been the main participants behind cross-border M&As. Yet, firms from
emerging markets are accounting for an ever greater share of global M&A activity. The value
of cross-border M&As peaked in 2000 at around $1.2 trillion. This figure accounted for about
3.7 percent of the market capitalization of all stock exchanges worldwide. Reasons previously
mentioned for the ups and downs of FDI inflows also cause the pattern we see in cross-border
M&A deals (see Figure 7.2). By 2007, the value of cross-border M&As rose to around $1 trillion.
But M&A activity was significantly lower in 2008, 2009, and 2010 due to effects of the global
financial crisis and global economic slowdown. By 2011, the value of cross-border M&A activity
had climbed back to $526 billion but then fell back to around $300 billion in 2012.
Many cross-border M&A deals are driven by the desire of companies to:
•
•
•
•
Get a foothold in a new geographic market.
Increase a firm’s global competitiveness.
Fill gaps in companies’ product lines in a global industry.
Reduce costs of research and development, production, distribution, and so forth.
Entrepreneurs and small businesses also play a role in the expansion of FDI inflows. There
is no data on the portion of FDI contributed by small businesses, but we know from anecdotal
evidence that these companies are engaged in FDI. Unhindered by many of the constraints of a
large company, entrepreneurs investing in other markets often demonstrate an inspiring can-do
$ billion
1200
1000
Source: Based on World Investment Report
(Geneva, Switzerland: UNCTAD), various
years.
800
600
400
200
0
Figure 7.2
Value of Cross-Border
Mergers and Acquisitions
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
210
part3 • internationaltraDeanDinvestment
Culture Matters
The Cowboy of Manchuria
Tom Kirkwood turned his dream of introducing his grandfather’s
taffy to China into a fast-growing business. Kirkwood’s story—his
hassles and hustling—provides some lessons on the purest form
of global investing. The basics that small investors in China can
follow are as rudimentary as they get. Find a product that’s easy to
make, widely popular, and cheap to sell, and then choose the least
expensive, investor-friendliest place to make it.
Kirkwood, whose family runs the Shawnee Inn, a ski and golf
resort in Shawnee-on-Delaware, Pennsylvania, decided to make
candy in Manchuria—China’s gritty, heavily populated, industrial
northeast. Chinese people often give individually wrapped candies
as a gift, and Kirkwood reckoned that China’s rising, increasingly
prosperous urbanites would have a lucrative sweet tooth. Kirkwood
realized that he could not beat M&Ms or Reese’s Pieces at their own
game. But he did not want to produce no-name candy to be sold
in bulk bins at the grocery store, either. He wanted to find a niche
and own it, because a niche in China can be worth an entire market
in another country.
Kirkwood concluded early on that he wanted to do business
in China. In the mid-1980s after prep school, he spent a year in
Taiwan and China learning Chinese and working in a Shanghai engineering company. The experience gave him a taste for adventure
capitalism on the frontier of China’s economic development. Using
$400,000 of Kirkwood’s family money, Kirkwood and his friend Peter
Moustakerski bought equipment and rented a factory in Shenyang,
a city of six million people in the heart of Manchuria. Roads and rail
transport were convenient, and wages were low. The local government seemed amenable to a 100 percent foreign-owned factory,
and the Shenyang Shawnee Cowboy Food Company was born.
Although it’s a small operation, it now has 89 employees and
is growing. Kirkwood is determined to succeed selling his candies
with names such as Longhorn Bars. As he boarded a flight to
Beijing for a meeting with a distributor recently, Kirkwood realized
he had a bag full of candy. He offered one to a flight attendant.
When lunch is over, he vowed, “Everybody on this plane will know
Cowboy Candy.”
spirit mixed with ingenuity and bravado. Another advantage individuals can possess is an understanding of the local language and culture of the market being entered. For a day-in-the-life look
at a young entrepreneur who is realizing his dreams in China, see the Culture Matters feature,
titled “The Cowboy of Manchuria.”
Worldwide Flows of FDI
Driving FDI growth are more than 100,000 multinational companies with more than 900,000
affiliates abroad, roughly half of which are in developing countries.2 In 2012, for the first
time ever, developing countries attracted greater FDI inflows than did developed countries.
Developed countries account for 42 percent ($561 billion) of total global FDI inflows (more
than $1.35 trillion in 2012). By comparison, FDI inflows to developing countries accounted
for around 52 percent of world FDI inflows ($703 billion). The remaining roughly six percent
of global FDI inflows went to countries across Southeast Europe in various stages of transition
from communism to capitalism.
Among developed countries, European Union (EU) nations, the United States, and Japan
account for the majority of world FDI inflows. Behind the large FDI figure for the EU is consolidation among large national competitors and further efforts at EU regional integration.
Developing nations had varying experiences in 2012. FDI inflows to developing nations in Asia
were $407 billion in 2012, with China attracting $121 billion of that total. India, the largest recipient
on the Asian subcontinent, had inflows of nearly $26 billion. FDI flowing from developing nations
in Asia is also on the rise, coinciding with the rise of these nations’ own global competitors.
Elsewhere, all of Africa drew in $50 billion of FDI in 2012, or about 4 percent of the world’s
total. FDI flows into Latin America and the Caribbean $244 billion in 2012, or 18 percent of the
total world FDI. Most of these inflows went to markets in South America with their growing
economies, expanding consumer bases, and rich endowments of natural resources. FDI inflows to
Southeast Europe and the Commonwealth of Independent States reached $87 billion in 2012, or
around 6.4 percent of the total world FDI.
QuIck Study 1
1. The purchase of physical assets or significant ownership of a company abroad to gain a
measure of management control is called a what?
2. What are the main drivers of foreign direct investment flows?
3. Why might a company engage in a cross-border merger or acquisition?
Chapter7 • ForeignDireCtinvestment 211
Theories of Foreign Direct Investment
So far, we have examined the flows of FDI, but we have not investigated explanations for why
FDI occurs. Let’s now investigate the four main theories that attempt to explain why companies
engage in FDI.
International Product Life Cycle
Although we introduced it in Chapter 5 in the context of international trade, the international
product life cycle is also used to explain FDI.3 The international product life cycle theory
states that a company begins by exporting its product and then later undertakes FDI as a product
moves through its life cycle. In the new product stage, a good is produced in the home country
because of uncertain domestic demand and to keep production close to the research department that developed the product. In the maturing product stage, the company directly invests in
production facilities in countries where demand is great enough to warrant its own production
facilities. In the final standardized product stage, increased competition creates pressures to
reduce production costs. In response, a company builds production capacity in low-cost developing nations to serve its markets around the world.
Despite its conceptual appeal, the international product life cycle theory is limited in its
power to explain why companies choose FDI over other forms of market entry. A local firm in
the target market could pay for (license) the right to use the special assets needed to manufacture
a particular product. In this way, a company could avoid the additional risks associated with
direct investments in the market. The theory also fails to explain why firms choose FDI over
exporting activities. It might be less expensive to serve a market abroad by increasing output at
the home country factory rather than by building additional capacity within the target market.
The theory explains why the FDI of some firms follows the international product life cycle
of their products. But it does not explain why other market entry modes are inferior or less
advantageous options.
international product life
cycle
theory stating that a company
begins by exporting its product
and then later undertakes foreign
direct investment as the product
moves through its life cycle.
Market Imperfections (Internalization)
A market that is said to operate at peak efficiency (prices are as low as they can possibly be) and
where goods are readily and easily available is said to be a perfect market. But perfect markets
are rarely, if ever, seen in business because of factors that cause a breakdown in the efficient
operation of an industry—called market imperfections. Market imperfections theory states
that when an imperfection in the market makes a transaction less efficient than it could be, a
company will undertake FDI to internalize the transaction and thereby remove the imperfection.
There are two market imperfections that are relevant to this discussion—trade barriers and specialized knowledge.
TrADe BArrIerS Tariffs are a common form of market imperfection in international business.
For example, the North American Free Trade Agreement stipulates that a sufficient portion of
a product’s content must originate within Canada, Mexico, or the United States for the product
to avoid tariff charges when it is imported to any of these three markets. That is why a large
number of Korean manufacturers invested in production facilities in Tijuana, Mexico, just south
of Mexico’s border with the state of California. By investing in production facilities in Mexico,
Korean companies were able to skirt the North American tariffs that would have been imposed if
they were to export goods from Korean factories. The presence of a market imperfection (tariffs)
caused those companies to undertake FDI.
SPeCIALIzeD KnOWLeDGe The unique competitive advantage of a company sometimes
consists of specialized knowledge. This knowledge could be the technical expertise of engineers
or the special marketing abilities of managers. When the knowledge is technical expertise,
companies can charge a fee to companies in other countries for use of the knowledge in
producing the same or a similar product. But when a company’s specialized knowledge is
embodied in its employees, the only way to exploit a market opportunity in another nation may
be to undertake FDI.
The possibility that a company will create a future competitor by charging others a fee for
access to its knowledge is another market imperfection that encourages FDI. Rather than trade a
short-term gain (the fee charged another company) for a long-term loss (lost competitiveness), a
market imperfections
theory stating that when an
imperfection in the market
makes a transaction less efficient
than it could be, a company
will undertake foreign direct
investment to internalize the
transaction and thereby remove
the imperfection.
212
part3 • internationaltraDeanDinvestment
At one time, Boeing aircraft
were made entirely in the
Unitedstates.Buttoday,
Boeingcansourceitslanding
geardoorsfromnorthern
ireland,outboardwingflaps
fromitaly,wingtipassemblies
fromKorea,andrudders
fromaustralia.shownhere,
thecorewingcomponents
ofaBoeing787Dreamliner
are loaded into a cargo jet at
Japaninternationalairport
tobeshippedtoWashington
forassembly.thewingswere
manufacturedinJapanby
mitsubishiheavyindustry.
Source: STR/AFP/Getty Images/Newscom
company will prefer to undertake investment. For example, as Japan rebuilt its industries following the Second World War, many Japanese companies paid Western firms for access to the special technical knowledge embodied in their products. Those Japanese companies became adept
at revising and improving many of these technologies and became leaders in their industries,
including electronics and automobiles.
eclectic Theory
eclectic theory
theory stating that firms
undertake foreign direct
investment when the features of a
particular location combine with
ownership and internalization
advantages to make a location
appealing for investment.
The eclectic theory states that firms undertake FDI when the features of a particular location
combine with ownership and internalization advantages to make a location appealing for investment.4 A location advantage is the advantage of locating a particular economic activity in
a specific location because of the characteristics (natural or acquired) of that location.5 These
advantages have historically been natural resources such as oil in the Middle East, timber in
Canada, or copper in Chile. But the advantage can also be an acquired one, such as a productive
workforce. An ownership advantage refers to company ownership of some special asset, such as
brand recognition, technical knowledge, or management ability. An internalization advantage is
one that arises from internalizing a business activity rather than leaving it to a relatively inefficient market. The eclectic theory states that when all of these advantages are present, a company
will undertake FDI.
Market Power
market power
theory stating that a firm
tries to establish a dominant
market presence in an industry
by undertaking foreign direct
investment.
vertical integration
Extension of company activities
into stages of production that
provide a firm’s inputs (backward
integration) or that absorb its
output (forward integration).
Firms often seek the greatest amount of power possible relative to rivals in their industries. The
market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking FDI. The benefit of market power is greater profit because the firm is far
better able to dictate the cost of its inputs and/or the price of its output.
One way a company can achieve market power (or dominance) is through vertical integration—
the extension of company activities into stages of production that provide a firm’s inputs (backward
integration) or that absorb its output (forward integration). Sometimes a company can effectively
control the world supply of an input needed by its industry if it has the resources or ability to integrate
backward into supplying that input. Companies may also be able to achieve a great deal of market
power if they can integrate forward to increase control over output. For example, they could perhaps
make investments in distribution to leapfrog channels of distribution that are tightly controlled by
competitors.
QuIck Study 2
1. What imperfections are relevant to the discussion of market imperfections theory?
2. Location, ownership, and internalization advantages combine in which FDI theory?
3. Which FDI theory depicts a firm establishing a dominant market presence in an industry?
Chapter7 • ForeignDireCtinvestment 213
Management Issues and Foreign Direct Investment
Decisions about whether to engage in FDI involve several important issues regarding management of the company and its market. Some of these issues are grounded in the inner workings of
firms that undertake FDI, such as the control desired over operations abroad or the firm’s cost of
production. Others are related to the market and the industry in which a firm competes, such as the
preferences of customers or the actions of rivals. Let’s now examine each of these important issues.
Control
Many companies investing abroad are greatly concerned with controlling the activities that occur in the local market. Perhaps the company wants to be certain that its product is being marketed in the same way in the local market as it is at home. Or maybe it wants to ensure that the
selling price remains the same in both markets. Some companies try to maintain ownership of a
large portion of the local operation, say, even up to 100 percent, in the belief that greater ownership gives them greater control.
Yet for a variety of reasons, even complete ownership does not guarantee control. For
example, the local government might intervene and require a company to hire some local managers rather than bringing them all in from the home office. Companies may need to prove a
scarcity of skilled local managerial talent before the government will let them bring managers
in from the home country. Governments might also require that all goods produced in the local
facility be exported so that they do not compete with products of the country’s domestic firms.
PArTnerShIP reqUIreMenTS Many companies have strict policies regarding how much
ownership they take in firms abroad because of the importance of maintaining control. In
the past, IBM (www.ibm.com) strictly required that the home office own 100 percent of all
international subsidiaries. But companies must sometimes abandon such policies if a country
demands shared ownership in return for market access.
Some governments saw shared ownership requirements as a way to shield their workers
from exploitation and their industries from domination by large international firms. Companies
would sometimes sacrifice control in order to pursue a market opportunity, but frequently they
did not. Most countries today do not take such a hard-line stance and have opened their doors to
investment by multinational companies. Mexico used to make decisions on investment by multinational corporations on a case-by-case basis. IBM was negotiating with the Mexican government for 100 percent ownership of a facility in Guadalajara and got the go-ahead only after the
company made numerous concessions in other areas.
BeneFITS OF COOPerATIOn Many nations have grown more cooperative toward international
companies in recent years. Governments of developing and emerging markets realize the
benefits of investment by multinational corporations, including decreased unemployment,
increased tax revenues, training to create a more highly skilled workforce, and the transfer of
technology. A country known for overly restricting the operations of multinational enterprises
can see its inward investment flow dry up. Indeed, the restrictive policies of India’s government
hampered FDI inflows for many years.
Cooperation also frequently opens important communication channels that help firms to
maintain positive relationships in the host country. Both parties tend to walk a fine line—cooperating most of the time, but holding fast on occasions when the stakes are especially high.
Belgium’s Interbrew, now part of Anheuser-Busch InBev (www.ab-inbev.com), benefited
from its cooperation with a local partner and respect for national pride in Central Europe when
it acquired Hungary’s Borsodi brewery (formerly a state-owned enterprise). From the start,
Interbrew wisely insisted that it would move ahead with its purchase only if local management
would be in charge. Interbrew then assisted local management with technical, marketing, sales,
distribution, and general management training.
Purchase-or-Build Decision
Another important matter for managers is whether to purchase an existing business or to build a
subsidiary abroad from the ground up—called a greenfield investment. An acquisition generally
provides the investor with an existing plant, equipment, and personnel. The acquiring firm may
also benefit from the goodwill the existing company has built up over the years and, perhaps,
214
part3 • internationaltraDeanDinvestment
Manager’s Briefcase
Surprises of Investing Abroad
The decision of whether to build facilities in a market abroad or to
purchase existing operations in the local market can be a difficult
one. Managers can minimize risk by preparing their companies for
a number of surprises they might face:
• Human Resource Policies Companies cannot always import
home country policies without violating local laws or offending local customs. Countries have differing requirements for
plant operations and have their own regulations regarding
business operations.
• Mandated Benefits These include company-supplied clothing and meals, required profit sharing, guaranteed employment contracts, and generous dismissal policies. These
costs can exceed an employee’s wages and are typically not
negotiable.
• Labor Costs France has a minimum wage of about $12 an
hour, whereas Mexico has a minimum wage of nearly $5 a
day. But Mexico’s real minimum wage is nearly double that
due to government-mandated benefits and employment
practices. Such differences are not always obvious.
• Labor Unions In some countries, organized labor is found
in nearly every industry and at almost every company. Rather
than dealing with a single union, managers may need to negotiate with five or six different unions, each of which represents a distinct skill or profession.
• Information Sometimes there simply is no reliable data on
factors such as labor availability, cost of energy, and national
inflation rates. These data are generally high quality in
developed countries but suspect in emerging and developing ones.
• Personal and Political Contacts These contacts can be extremely important in developing and emerging markets and
can be the only way to establish operations. But complying
with locally accepted practices can cause ethical dilemmas for
managers.
the existing firm’s brand recognition. The purchase of an existing business can also allow for
alternative methods of financing the purchase, such as an exchange of stock ownership between
the companies. Factors that reduce the appeal of purchasing existing facilities include obsolete
equipment, poor relations with workers, and an unsuitable location. For insight into several
issues managers consider when deciding to build or purchase operations, see the Manager’s
Briefcase, titled “Surprises of Investing Abroad.”
Mexico’s Cemex, S.A. (www.cemex.com), is a multinational company that made a fortune buying struggling, inefficient plants around the world and turning them around. Chairman
Lorenzo Zambrano has long figured that the overriding principle is “Buy big globally, or be
bought.” The success of Cemex in using FDI confounded, even rankled, its competitors in developed nations. For example, Cemex shocked global markets when it carried out a $1.8 billion
purchase of Spain’s two largest cement companies, Valenciana and Sanson.
But adequate facilities in the local market are sometimes unavailable, and a company must
go ahead with a greenfield investment. For example, because Poland is a source of skilled and
inexpensive labor, it is an appealing location for automobile manufacturers. But the country
had little in the way of advanced automobile-production facilities when General Motors (www.
gm.com) considered investing there. So GM built a $320 million facility in Poland’s Silesian
region. The factory has the potential to produce 200,000 units annually—some of which are
destined for export to profitable markets in Western Europe. However, greenfield investments
can have their share of headaches. Obtaining the necessary permits, financing, and hiring local
personnel can be a real problem in some markets.
Production Costs
rationalized production
System of production in which
each of a product’s components
is produced where the cost of
producing that component is
lowest.
Many factors contribute to production costs in every national market. Labor regulations can
add significantly to the overall cost of production. Companies may be required to provide benefits packages for their employees that are over and above hourly wages. More time than was
planned for might be required to train workers adequately in order to bring productivity up to
an acceptable standard. Although the cost of land and the tax rate on profits can be lower in the
local market (or purposely lowered to attract multinational corporations), the fact that they will
remain constant cannot be assumed. Companies from around the world using China as a production base have witnessed rising wages erode their profits as the nation continues to industrialize.
Some companies are therefore finding that Vietnam is now their low-cost location of choice.
rATIOnALIzeD PrODUCTIOn One approach companies use to contain production costs
is called rationalized production—a system of production in which each of a product’s
Chapter7 • ForeignDireCtinvestment 215
components is produced where the cost of producing that component is lowest. All the
components are then brought together at one central location for assembly into the final product.
Consider the typical stuffed animal made in China whose components are all imported to China
(with the exception of the polycore thread with which it’s sewn). The stuffed animal’s eyes are
molded in Japan. Its outfit is imported from France. The polyester-fiber stuffing comes from
either Germany or the United States, and the pile-fabric fur is produced in Korea. Only final
assembly of these components occurs in China.
Although this production model is highly efficient, a potential problem is that a work stoppage in one country can bring the entire production process to a standstill. For example, the
production of automobiles is highly rationalized, with parts coming in from a multitude of countries for assembly. When the United Auto Workers (www.uaw.org) union held a strike for weeks
against GM (www.gm.com), many of GM’s international assembly plants were threatened. The
UAW strategically launched their strike at GM’s plant that supplied brake pads to virtually all of
its assembly plants throughout North America.
MexICO’S MAqUILADOrA Stretching 2,000 miles from the Pacific Ocean to the Gulf of Mexico
lies a 130-mile-wide strip along the U.S.–Mexican border that comprises a special economic
region. The region’s economy encompasses 11 million people and $150 billion in output. The
combination of a low-wage economy nestled next to a prosperous giant is now becoming a
model for other regions that are split by wage or technology gaps. Some analysts compare the
U.S.–Mexican border region with that between Hong Kong and its manufacturing realm, China’s
Guangdong province. Officials from cities along the border between Germany and Poland studied
the U.S.–Mexican experience to see what lessons could be applied to their unique situation.
COST OF reSeArCh AnD DeveLOPMenT As technology becomes an increasingly powerful
competitive factor, the soaring cost of developing subsequent stages of technology has led
multinational corporations to engage in cross-border alliances and acquisitions. For instance, huge
multinational pharmaceutical companies are intensely interested in the pioneering biotechnology
work done by smaller, entrepreneurial start-ups. Cadus Pharmaceutical Corporation of New
York discovered the function of 400 genes related to what are called receptor molecules. Many
disorders are associated with the improper functioning of these receptors—making them good
targets for drug development. Britain’s SmithKline Beecham (www.gsk.com) then invested
around $68 million in Cadus in return for access to its research knowledge.
One indicator of technology’s significance in FDI is the amount of research and development (R&D) conducted by company affiliates in other countries. The globalization of innovation and the phenomenon of foreign investment in R&D are not necessarily motivated by
demand factors such as the size of local markets. They instead appear to be encouraged by
supply factors, including gaining access to high-quality scientific and technical human capital.
MyManagementLab: Watch It—Bringing Jobs Back
to the united States
Apply what you have learned so far about foreign direct investment. If your instructor has
assigned this, go to mymanagementlab.com to watch a video case to learn more about
why companies decide to make products in a particular country and its effects on people's
livelihoods.
Customer Knowledge
The behavior of buyers is frequently an important issue in the decision of whether to undertake
FDI. A local presence can help companies gain valuable knowledge about customers that could
not be obtained from the home market. For example, when customer preferences for a product
differ a great deal from country to country, a local presence might help companies better understand such preferences and tailor their products accordingly.
Some countries have quality reputations in certain product categories. German automotive
engineering, Italian shoes, French perfume, and Swiss watches impress customers as being of
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Global Sustainability
Greening the Supply Chain
• The Rainforest Action Network (RAN) wanted to get
paper and wood products manufacturer Boise Cascade
(www.bc.com) to protect endangered forests. Instead of
approaching Boise Cascade directly, RAN contacted 400 of
its customers, including Home Depot. RAN convinced Home
Depot (www.homedepot.com) to phase out wood products
not certified as originating from well-managed forests. It also
convinced FedEx Office (www.fedex.com/us/office) to drop
Boise Cascade as a supplier. The strategy encouraged Boise
Cascade to adopt an environmental policy, part of which
involved no longer harvesting U.S. virgin forests.
• When furniture manufacturer Herman Miller (www.hermanmiller.
com) started creating its environmentally friendly chair the
Mirra, it asked potential suppliers to provide a list of ingredients that went into the part it would supply. Every material and
chemical inside each component was assigned a color code
of green (environmentally friendly), yellow (neutral), or red (like
PVC plastic). The goal was to avoid red-coded materials, minimize yellows, and maximize the greens. Herman Miller bought
components only from companies that (1) supplied its list of ingredients, and (2) had “greener” components than competitors
had.
• When Apple (www.apple.com) decided to pull its products
from the Electronic Product Environmental Assessment Tool
(EPEAT) environmental registry, it expected no one would
notice. But some major Apple customers, like educational
institutions and governments, must make most or all of their
technology purchases from products on the EPEAT–certified list, comprising $65 billion worth of goods annually. The
backlash from consumers, corporations, and government
agencies forced Apple to backtrack. Apple said its products
would again be submitted for certification and that its relationship with EPEAT “has become stronger as a result of this
experience.”
Sources: Jon Fortt, “EPEAT CEO: Apple’s Exit Spurred a Customer Backlash,” CNBC
website (www.cnbc.com), July 13, 2012; Peter Senge, The Necessary Revolution (New
York: Broadway Books, 2010), pp. 107–108; Daniel C. Esty and Andrew S. Winston,
Green to Gold (New Haven, CT: Yale University Press, 2006), pp. 84–85, 176–177.
superior quality. Because of these perceptions, it can be profitable for a firm to produce its product in the country with the quality reputation, even if the company is based in another country. For
example, a cologne or perfume producer might want to bottle its fragrance in France and give it a
French name. This type of image appeal can be strong enough to encourage FDI.
Following Clients
Firms commonly engage in FDI when the firms they supply have already invested abroad. This
practice of “following clients” is common in industries in which producers source component
parts from suppliers with whom they have close working relationships. The practice tends to result in companies clustering within close geographic proximity to each other because they supply
each other’s inputs (see Chapter 5). When Mercedes (www.mercedes.com) opened its first international car plant in Tuscaloosa County, Alabama, automobile-parts suppliers also moved to the
area from Germany—bringing with them additional investment in the millions of dollars.
With firms working closely together to deliver a product on a global basis, they get to know
one another rather well. And the movement toward making business activities more environmentally, economically, and socially sustainable means that companies sometimes pressure their
suppliers and their clients to “green” their activities. For several examples of how businesses have
done this, read this chapter’s Global Sustainability feature, titled “Greening the Supply Chain.”
Following rivals
FDI decisions frequently resemble a “follow the leader” scenario in industries that have a limited number of large firms. In other words, many of these firms believe that choosing not to
make a move parallel to that of the “first mover” might result in being shut out of a potentially
lucrative market. When firms based in industrial countries moved back into South Africa after
the end of apartheid, their competitors followed. Of course, each market can sustain only a certain number of rivals and firms that cannot compete often choose to exit the market. This seems
to have been the case for Pepsi (www.pepsi.com), which went back into South Africa in the
1990s but withdrew three years later after being crushed there by Coke (www.cocacola.com).
In this section, we have presented several key issues managers consider when investing
abroad. We will have more to say on this topic in Chapter 15, when we learn how companies
take on this ambitious goal.
Chapter7 • ForeignDireCtinvestment 217
QuIck Study 3
1. When adequate facilities are not present in a market, a firm may decide to undertake a what?
2. A system in which a product’s components are made where the cost of producing a component is lowest is called what?
3. What do we call the situation in which a company engages in FDI because the firms it supplies have already invested abroad?
Why Governments Intervene in FDI
Nations often intervene in the flow of FDI in order to protect their cultural heritages, domestic
companies, and jobs. They can enact laws, create regulations, or construct administrative hurdles
that companies from other nations must overcome if they want to invest in the nation. Yet, rising
competitive pressure is forcing nations to compete against each other to attract multinational
companies. The increased national competition for investment is causing governments to enact
regulatory changes that encourage investment. The majority of regulatory changes that governments introduced in recent years are more favorable to FDI.6
In a general sense, a bias toward protectionism or openness is rooted in a nation’s culture,
history, and politics. Values, attitudes, and beliefs form the basis for much of a government’s
position regarding FDI. For example, South American nations with strong cultural ties to a
European heritage (such as Argentina) are generally enthusiastic about investment received
from European nations. South American nations with stronger indigenous influences (such as
Ecuador) are generally less enthusiastic.
Opinions vary widely on the appropriate amount of FDI a country should encourage. At one
extreme are those who favor complete economic self-sufficiency and who oppose any form of FDI.
At the other extreme are those who favor no governmental intervention and who favor booming
FDI inflows. Between these two extremes lie most countries, which believe a certain amount of
FDI is desirable to raise national output and enhance the standard of living for their people.
Besides philosophical ideals, countries intervene in FDI for a host of very practical reasons.
But to fully appreciate those reasons, we must first understand what is meant by a country’s balance of payments.
Balance of Payments
A country’s balance of payments is a national accounting system that records all receipts coming
into the nation and all payments to entities in other countries. International transactions that result in
inflows from other nations add to the balance of payments accounts. International transactions that
result in outflows to other nations reduce the balance of payments accounts. Table 7.1 shows the
balance of payments accounts for the United States, which has two major components—the current
account and the capital account. The balances of the current and capital accounts should be equal.
balance of payments
CUrrenT ACCOUnT The current account is a national account that records transactions
current account
involving the export and import of goods and services, income receipts on assets abroad, and
income payments on foreign assets inside the country. The merchandise account in Table 7.1
covers tangible goods such as computer software, electronic components, and apparel. An
“Export” of merchandise is assigned a positive value in the balance of payments because income
is received. An “Import” is assigned a negative value because money is paid to a firm abroad.
The services account involves tourism, business consulting, banking, and other services.
Suppose a business in the United States receives payment for consulting services provided to a
company in another country. The receipt is recorded as an “Export” of services and is assigned
a positive value. An “Import” of services requires money to be sent out of a nation and therefore
receives a negative value.
The income receipts account is income earned on U.S. assets held abroad. When a U.S.
company’s subsidiary abroad remits profits back to the parent in the United States, it is recorded
as an “Income receipt” and is assigned a positive value.
National account that records
transactions involving the export
and import of goods and services,
income receipts on assets abroad,
and income payments on foreign
assets inside the country.
National accounting system that
records all receipts coming into
the nation and all payments to
entities in other countries.
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Table 7.1 U.S. Balance of Payments Accounts
CURRENT ACCOUNT
Exports of goods and services and income receipts
Merchandise
+
+
Services
+
Income receipts on U.S. assets abroad
+
Imports of goods and services and income payments
–
Merchandise
–
Services
–
Income payments on foreign assets in United States
–
Unilateral transfers
–
+∙–
Current account balance
CAPITAL ACCOUNT
Increase in U.S. assets abroad (capital outflow)
U.S. official reserve assets
–
Other U.S. government assets
–
U.S. private assets
–
Foreign assets in the United States (capital inflow)
When a country exports more
goods and services and receives
more income from abroad than it
imports and pays abroad.
current account deficit
When a country imports more
goods and services and pays
more abroad than it exports and
receives from abroad.
capital account
National account that records
transactions involving the
purchase and sale of assets.
+
Foreign official assets
+
Other foreign assets
+
Capital account balance
current account surplus
–
+∙–
Finally, the income payments account is money paid to entities in other nations that was
earned on assets held in the United States. For example, when a French company’s U.S. subsidiary sends its profits back to the parent company in France, the transaction is recorded as an
“Income payment” and is assigned a negative value.
A current account surplus occurs when a country exports more goods and services and
receives more income from abroad than it imports and pays abroad. Conversely, a current
account deficit occurs when a country imports more goods and services and pays more abroad
than it exports and receives from abroad.
CAPITAL ACCOUnT The capital account is a national account that records transactions
involving the purchase and sale of assets. Suppose a U.S. citizen buys shares of stock in a
Mexican company on Mexico’s stock market. The transaction is recorded as an “Increase in U.S.
assets abroad (capital outflow)” and is assigned a negative value. If a Mexican investor buys real
estate in the United States, the transaction increases “Foreign assets in the United States (capital
inflow)” and is assigned a positive value.
reasons for Intervention by the host Country
There are a number of reasons why governments intervene in FDI. Let’s look at the two main
reasons—to control the balance of payments and to obtain resources and benefits.
COnTrOL BALAnCe OF PAyMenTS Many governments see intervention as the only way
to keep their balance of payments under control. First, because FDI inflows are recorded as
additions to the balance of payments, a nation gets a balance-of-payments boost from an initial
FDI inflow. Second, countries can impose local content requirements on investors from other
nations for the purpose of local production. This gives local companies the chance to become
suppliers to the production operation, which can help the nation to reduce imports and improve
its balance of payments. Third, exports (if any) generated by the new production operation can
have a favorable impact on the host country’s balance of payments.
When companies repatriate profits back to their home countries, however, they deplete the
foreign exchange reserves of their host countries. These capital outflows decrease the balance of
Chapter7 • ForeignDireCtinvestment 219
payments of the host country. To shore up its balance of payments, the host nation may prohibit
or restrict the nondomestic company from removing profits to its home country.
Alternatively, host countries conserve their foreign exchange reserves when international
companies reinvest their earnings. Reinvesting in local manufacturing facilities can also improve
the competitiveness of local producers and boost a host nation’s exports—thus improving its
balance-of-payments position.
OBTAIn reSOUrCeS AnD BeneFITS Beyond balance-of-payments reasons, governments
might intervene in FDI flows to acquire resources and benefits such as technology, management
skills, and employment.
Access to Technology Investment in technology, whether in products or processes, tends to
increase the productivity and the competitiveness of a nation. That is why host nations have a strong
incentive to encourage the importation of technology. For years, developing countries in Asia were
introduced to expertise in industrial processes as multinational corporations set up factories within
their borders. But today, some of them are trying to acquire and develop their own technological
expertise. When German industrial giant Siemens (www.siemens.com) chose Singapore as the site
for an Asia-Pacific microelectronics design center, Singapore gained access to valuable technology.
Singapore also accessed valuable semiconductor technology by joining with U.S.-based Texas
Instruments (www.ti.com) and others to set up the country’s first semiconductor-production facility.
Management Skills and employment As we saw in Chapter 4, formerly communist nations
lack some of the management skills needed to succeed in the global economy. By encouraging
FDI, these nations can attract talented managers to come in and train locals and thereby improve
the international competitiveness of their domestic companies. Furthermore, locals who are
trained in modern management techniques may eventually start their own local businesses—
further expanding employment opportunities. Yet, detractors argue that although FDI can create
jobs it can also destroy jobs if less-competitive local firms are forced out of business.
reasons for Intervention by the home Country
Home nations (those from which international companies launch their investments) may also
seek to encourage or discourage outflows of FDI for a variety of reasons. But home nations tend
to have fewer concerns because they are often prosperous, industrialized nations. For these countries, an outward investment seldom has a national impact—unlike the impact on developing or
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220
part3 • internationaltraDeanDinvestment
emerging nations that receive the FDI. Nevertheless, the following are among the most common
reasons for discouraging outward FDI:
• Investing in other nations sends resources out of the home country.
As a result, fewer resources are used for development and economic growth at home. On the other hand, profits
earned on assets abroad that are returned home increase both a home country’s balance of
payments and its available resources.
• Outgoing FDI may ultimately damage a nation’s balance of payments by taking the place
of its exports. This can occur when a company creates a production facility in a market
abroad, the output of which replaces exports that used to be sent there from the home country. For example, if a Volkswagen (www.vw.com) plant in the United States fills a demand
that U.S. buyers would otherwise satisfy with purchases of German-made automobiles,
Germany’s balance of payments is correspondingly decreased. Still, Germany’s balance of
payments would be positively affected when Volkswagen repatriates U.S. profits, which
helps negate the investment’s initial negative balance-of-payments effect. Thus, an international investment might make a positive contribution to the balance-of-payments position
of the country in the long term and offset an initial negative impact.
• Jobs resulting from outgoing investments may replace jobs at home. This is often the
most contentious issue for home countries. The relocation of production to a low-wage nation can have a strong impact on a locale or region. However, the impact is rarely national,
and its effects are often muted by other job opportunities in the economy. In addition, there
may be an offsetting improvement in home country employment if additional exports are
needed to support the activity represented by the outgoing FDI. For example, if Hyundai
(www.hyundai-motor.com) of South Korea builds an automobile manufacturing plant in
Brazil, Korean employment may increase in order to supply the Brazilian plant with parts.
FDI is not always a negative influence on home nations. In fact, countries promote outgoing
FDI for the following reasons:
• Outward FDI can increase long-term competitiveness.
Businesses today frequently compete on a global scale. The most competitive firms tend to be those that conduct business
in the most favorable locations anywhere in the world, continuously improve their performance relative to competitors, and derive technological advantages from alliances formed
with other companies. Japanese companies have become masterful at benefiting from FDI
and cooperative arrangements with companies from other nations. The key to their success
is that Japanese companies see every cooperative venture as a learning opportunity.
• Nations may encourage FDI in industries identified as “sunset” industries. Sunset industries are those that use outdated and obsolete technologies or those that employ low-wage
workers with few skills. These jobs are not greatly appealing to countries having industries
that pay skilled workers high wages. By allowing some of these jobs to go abroad and by
retraining workers in higher-paying skilled work, they can upgrade their economies toward
“sunrise” industries. This represents a trade-off for governments between a short-term loss
of jobs and the long-term benefit of developing workers’ skills.
QuIck Study 4
1. The national accounting system that records all receipts coming into a nation and all payments to entities in other countries is called what?
2. Why might a host country intervene in foreign direct investment?
3. Why might a home country intervene in foreign direct investment?
Government Policy Instruments and FDI
Over time, both host and home nations have developed a range of methods either to promote or
to restrict FDI (see Table 7.2). Governments use these tools for many reasons, including improving balance-of-payments positions, acquiring resources, and, in the case of outward investment,
keeping jobs at home. Let’s take a look at these methods.
Chapter7 • ForeignDireCtinvestment 221
Table 7.2 Instruments of FDI Policy
Host Countries
FdI Promotion
FdI Restriction
Tax incentives
Ownership restrictions
Low-interest loans
Performance demands
Infrastructure improvements
Home Countries
Insurance
Differential tax rates
Loans
Sanctions
Tax breaks
Political pressure
host Countries: Promotion
Host countries offer a variety of incentives to encourage FDI inflows. These take two general
forms—financial incentives and infrastructure improvements.
FInAnCIAL InCenTIveS Host governments of all nations grant companies financial incentives
to invest within their borders. One method includes tax incentives, such as lower tax rates or
offers to waive taxes on local profits for a period of time—extending as far out as five years or
more. A country may also offer low-interest loans to investors.
The downside of these types of incentives is that they can allow multinational corporations
to create bidding wars between locations that are vying for the investment. In such cases, the
company typically invests in the most appealing region after the locations endure rounds of escalating incentives. Companies have even been accused of engaging other governments in negotiations to force concessions from locations already selected for investment. The cost to taxpayers
of attracting FDI can be several times what the actual jobs themselves pay—especially when
nations try to one-up each other to win investment.
InFrASTrUCTUre IMPrOveMenTS Because of the problems associated with financial incentives,
some governments are taking an alternative route to luring investment. Lasting benefits for
communities surrounding the investment location can result from making local infrastructure
improvements—better seaports suitable for containerized shipping, improved roads, and advanced
telecommunications systems. For instance, Malaysia is carving an enormous Multimedia Super
Corridor (MSC) into a region’s forested surroundings. The MSC promises a paperless government,
an intelligent city called Cyberjaya, two telesuburbs, a technology park, a multimedia university,
and an intellectual property–protection park. The MSC is dedicated to creating the most advanced
technologies in telecommunications, medicine, distance learning, and remote manufacturing.
host Countries: restriction
Host countries also have a variety of methods to restrict incoming FDI. Again, these take two
general forms—ownership restrictions and performance demands.
OWnerShIP reSTrICTIOnS Governments can impose ownership restrictions that prohibit
nondomestic companies from investing in certain industries or from owning certain types of
businesses. Such prohibitions typically apply to businesses in cultural industries and companies
vital to national security. For example, as some cultures try to protect traditional values,
accepting investment by multinational companies can create controversy among conservatives,
moderates, and liberals. Also, most nations do not allow FDI in their domestic weapons or
national defense firms. Another ownership restriction is a requirement that nondomestic
investors hold less than a 50 percent stake in local firms when they undertake FDI.
But nations sometimes eliminate such restrictions when a firm can choose another location
that has no such restriction in place. When GM was deciding whether to invest in an aging automobile plant in Jakarta, Indonesia, the Indonesian government scrapped its ownership restriction
of an eventual forced sale to Indonesians because China and Vietnam were also courting GM for
the same financial investment.
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PerFOrMAnCe DeMAnDS More common than ownership requirements are performance
demands that influence how international companies operate in the host nation. Although
typically viewed as intrusive, most international companies allow for them in the same way they
allow for home-country regulations. Performance demands include ensuring that a portion of the
product’s content originates locally, stipulating that a portion of the output must be exported, or
requiring that certain technologies be transferred to local businesses.
home Countries: Promotion
To encourage outbound FDI, home-country governments can do any of the following:
• Offer insurance to cover the risks of investments abroad, including, among others, insur-
ance against expropriation of assets and losses from armed conflict, kidnappings, and
terrorist attacks.
• Grant loans to firms wishing to increase their investments abroad. A home-country government may also guarantee the loans that a company takes from financial institutions.
• Offer tax breaks on profits earned abroad or negotiate special tax treaties. For example,
several multinational agreements reduce or eliminate the practice of double taxation—
profits earned abroad being taxed both in the home and host countries.
• Apply political pressure on other nations to get them to relax their restrictions on inbound
investments. Non-Japanese companies often find it very difficult to invest inside Japan. The
United States, for one, repeatedly pressures the Japanese government to open its market
further to FDI. But because such pressure has achieved little success, many U.S. companies
cooperate with local Japanese businesses when entering Japan’s markets.
home Countries: restriction
On the other hand, to limit the effects of outbound FDI on the national economy, home governments may exercise either of the following two options:
• Impose differential tax rates that charge income from earnings abroad at a higher rate than
domestic earnings;
• Impose outright sanctions that prohibit domestic firms from making investments in certain
nations.
QuIck Study 5
1. What policy instruments can host countries use to promote FDI?
2. What policy instruments can home countries use to promote FDI?
3. Ownership restrictions and performance demands are policy instruments used by whom to
do what?
4. Differential tax rates and sanctions are policy instruments used by whom to do what?
Bottom Line for Business
C
ompanies ranging from massive global corporations to adventurous entrepreneurs all contribute to FDI flows, and the longterm trend in FDI is upward. Here we briefly discuss the influence
of national governments on FDI flows and the flow of FDI in Asia
and Europe.
national Governments and Foreign Direct Investment
The actions of national governments have important implications for business. Companies can either be thwarted in their
efforts or be encouraged to invest in a nation, depending on
the philosophies of home and host governments. The balanceof-payments positions of both home and host countries are also
important because FDI flows affect the economic health of nations.
To attract investment, a nation must provide a climate conducive
to business operations, including pro-growth economic policies, a
stable regulatory environment, and a sound infrastructure, to name
just a few.
Increased competition for investment by multinational corporations has caused nations to make regulatory changes more
favorable to FDI. Moreover, just as nations around the world are
Chapter7 • ForeignDireCtinvestment 223
creating free trade agreements (covered in Chapter 8), they are
also embracing bilateral investment treaties. These bilateral investment treaties are becoming prominent tools used to attract investment. Investment provisions within free trade agreements are also
receiving greater attention than in the past. These efforts to attract
investment have direct implications for the strategies of multinational companies, particularly when it comes to deciding where to
locate production, logistics, and back-office service activities.
Foreign Direct Investment in europe
FDI inflows into the developing (transition) nations of Southeast
Europe and the Commonwealth of Independent States hit an alltime high in 2008. Countries that recently entered the European
Union did particularly well. They saw less investment in areas supporting low-wage, unskilled occupations and greater investment
in higher value-added activities that take advantage of a welleducated workforce.
The main reason for the fast pace at which FDI is occurring in
Western Europe is regional economic integration. Some of the
foreign investment reported by the European Union certainly went
to the relatively less-developed markets of the new Central and
Eastern European members. But much of the activity occurring
among Western European companies is industry consolidation
brought on by the opening of markets and the tearing down of
barriers to free trade and investment. Change in the economic
landscape across Europe is creating a more competitive business
climate there.
Foreign Direct Investment in Asia
China attracts the majority of Asia’s FDI, luring companies with
a lower-wage workforce and access to an enormous domestic
market. Many companies already active in China are upping their
investment further, and companies not yet there are developing
strategies for how to include China in their future plans. The “offshoring” of services will likely propel continued FDI in the coming
years, for which India is the primary destination. India’s attraction is
its well-educated, low-cost, and English-speaking workforce.
An aspect of national business environments that has implications for future business activity is the natural environment. By
their actions, businesses lay the foundation for people’s attitudes
in developing nations toward FDI by multinational corporations.
For example, some early cases of FDI in China were characterized by a lack of control over people’s actions due to greater
decentralization in China’s politics and increased power in the
hands of local Communist Party bosses and bureaucrats. These
individuals were often more motivated by their personal financial
gain than they were concerned with the wider impact on society.
But China’s government is increasing its spending on the environment, and multinational corporations are helping in cleaning up
the environment.
MyManagementLab™
Go to mymanagementlab.com to complete the problems marked with this icon
.
Chapter Summary
LO1. Describe the worldwide pattern of foreign direct investment (FDI).
• For the first time ever, developing countries attracted about 52 percent of global
FDI inflows (worth $1.35 trillion in 2012) whereas developed countries attracted
42 percent.
• Among developed countries, the EU, the United States, and Japan account for the
majority of FDI inflows.
• FDI to developing Asian nations was nearly $407 billion in 2012, with China attracting more than $121 billion and India attracting nearly $26 billion. FDI to
Latin America and the Caribbean accounted for about 18 percent of the world
total.
• Globalization and mergers and acquisitions are the two main drivers of global FDI.
LO2. Summarize each theory that attempts to explain why FDI occurs.
• The international product life cycle theory says that a company begins by exporting its product and then later undertakes FDI as the product moves through its life
cycle.
• Market imperfections theory says that a company undertakes FDI to internalize a transaction and remove an imperfection in the marketplace that is causing
inefficiencies.
• The eclectic theory says that firms undertake FDI when the features of a location
combine with ownership and internalization advantages to make for an appealing
investment.
• The market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking FDI.
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part3 • internationaltraDeanDinvestment
LO3. Outline the important management issues in the FDI decision.
• Companies investing abroad often wish to control activities in the local market, but
even 100 percent ownership may not guarantee control.
• Acquisition of an existing business is preferred when it has updated equipment, good
relations with workers, and a suitable location.
• A company might need to undertake a greenfield investment when adequate facilities
are unavailable in the local market.
• Firms often engage in FDI when it gives them valuable knowledge of local buyer
behavior, or when it locates them close to client firms and rival firms.
LO4. Explain why governments intervene in FDI.
• Host nations receive a balance-of-payments boost from initial FDI and from any
exports the FDI generates, but they see a decrease in balance of payments when a
company sends profits to the home country.
• FDI in technology brings in people with management skills who can train locals and
increase a nation’s productivity and competitiveness.
• Home countries can restrict a FDI outflow because it lowers the balance of payments, but profits earned on assets abroad and sent home increase the balance of
payments.
• FDI outflows may replace jobs at home that were based on exports to the host
country, and may damage a home nation’s balance of payments if they reduce prior
exports.
LO5. Describe the policy instruments governments use to promote and restrict FDI.
• Host countries promote FDI inflows by offering companies tax incentives, extending
low interest loans, and making local infrastructure improvements.
• Host countries restrict FDI inflows by imposing ownership restrictions, and by
creating performance demands that influence how a company operates.
• Home countries promote FDI outflows by offering insurance to cover investment
risk, granting loans to firms investing abroad, guaranteeing company loans, offering
tax breaks on profits earned abroad, negotiating special tax treaties, and applying
political pressure on other nations to accept FDI.
• Home countries restrict FDI outflows by imposing differential tax rates that charge
income from earnings abroad at a higher rate than domestic earnings and by imposing sanctions that prohibit domestic firms from making investments in certain
nations.
Key Terms
balance of payments (p. 217)
capital account (p. 218)
current account (p. 217)
current account deficit (p. 218)
current account surplus (p. 218)
eclectic theory (p. 212)
foreign direct investment (FDI)
(p. 208)
international product life cycle (p. 211)
market imperfections (p. 211)
market power (p. 212)
portfolio investment (p. 208)
rationalized production
(p. 214)
vertical integration (p. 212)
Talk About It 1
You overhear your supervisor tell another manager in the company, “I’m fed up with our
nation’s companies sending jobs abroad to lower-wage nations. Don’t they have any national
pride?” The other manager responds, “I disagree. It’s every company’s duty to make as much
profit as possible for its owners. If that means going abroad to reduce costs, so be it.”
7-1. Do you agree with either of these managers? Explain.
7-2. Which FDI policy instruments might each manager support? Be specific.
Chapter7 • ForeignDireCtinvestment 225
Talk About It 2
The global automaker you work for has decided to invest in building a greenfield automobile
assembly facility in Costa Rica with a local partner.
7-3. Which FDI theory presented in this chapter might explain your company’s decision?
7-4. In what areas might your company want to exercise control, and in what areas might it
cede control to the partner? Be specific.
Ethical Challenge
You are the production manager for a global business with assembly facilities around the
world. The business has tended to manufacture in the home country, a developed one, with the
assembly of the products taking place in a strategically located country in each of the major
groupings of markets. You have been asked to look at relocating some of the production of the
older product lines in some of these assembly facilities and using them as production plants.
Traditionally production has worked closely with research and development in the home
country. Your changes need to reflect the fact that sales have fallen in the home market with
increased competition. At the same time, key markets around the world are booming. “Home
or abroad?” is the question and the potential future of the business is in your hands.
7-5. With demand low in the home country, why might it make sense to relocate production to
a developing nation?
7-6. How would you consider the manufacture of maturing products? Would you consider
moving production elsewhere?
7-7. What are the advantages and disadvantages for the domestic production facilities of moving production abroad?
Teaming Up
In a group of three or four, in the role of advisors to a developed country, you have been asked
to outline some of the downsides of outgoing FDI. Consider the following questions and then
share your ideas with the rest of the class.
7-8. In the view of the group, what are the resource implications of investing in other
countries?
7-9. What is the group’s view that outgoing FDI might actually damage the balance of payment as they are taking the place of exports?
7-10. Outgoing FDI can only lead to many job losses at home. Discuss.
Market Entry
Strategy Project
This exercise corresponds to the MESP online simulation. For the country your team is
researching, integrate your answers to the following questions into your completed MESP
report.
7-11.
7-12.
7-13.
7-14.
7-15.
7-16.
Does the country attract a large amount of FDI?
Is the country a major source of FDI for other nations?
Have any of the nation’s large firms merged with, or acquired, a firm in another country?
Do labor unions have a weak, moderate, or strong presence in the nation?
Does the nation have healthy balance-of-payments accounts?
What policy instruments, if any, does the government use to promote or restrict FDI?
226
part3 • internationaltraDeanDinvestment
MyManagementLab™
Go to mymanagementlab.com for the following Assisted-graded writing questions:
7-17. Sometimes a company has a reputation for quality that is inextricably linked to the home country where it is made.
What can a company do to reduce the risk of tarnishing its reputation for quality if it begins making its products
abroad?
7-18. developing nations and emerging markets are increasingly important to the global economy, not only as markets
for goods but also as sources of FdI. How is the rise of developing and emerging markets changing the pattern of
worldwide FdI flows?
Chapter7 • ForeignDireCtinvestment 227
Practicing International Management Case
Driving the Green Car Market in Australia
H
igh fuel costs and concerns over climate change are just two
factors that have caused Australia’s once-booming automotive
industry to stall in recent years. Although car exports stood at a
respectable $5.2 billion in 2008, making it one of the country’s top
ten export earners ahead of more traditional exports such as wine,
wheat, and wool, there has been a significant change in consumer
preferences. While the market was once dominated by demand
for large passenger cars, consumers both domestically and abroad
now want smaller cars with lower fuel consumption.
As well as demands for change from car buyers, the industry
has also been facing the double whammy of pressures on costs
from within. Longstanding plans to cut trade tariffs and quotas
that had protected the industry since 1985 have been causing
alarm about what the future might hold because there is now even
less incentive to build cars locally. Although the automotive industry around the world has been suffering in the deep financial
downturn of the time, any further pressure on Australian car manufacturing would undoubtedly have a devastating effect. Australian
carmakers build about 320,000 vehicles a year and employ about
65,000 people. Many others are also engaged in associated industries that benefit from the large market.
When Mitsubishi closed the last of its manufacturing plants in
2008, leaving just three automakers operating in the country (local
subsidiaries of Ford, Toyota, and General Motors), the government could see it was time to act. To add a sense of urgency, Ford
Australia announced plans to cut 450 jobs, as industry figures
showed car sales down 11 percent from the year before.
The solution was a proposal to spend $3.4 billion between
2011 and 2020 on a fund to transform the Australian automotive
industry into the green car market. The intention is to use the fund
to help the manufacturers still involved in that country with the
costs of developing new technologies for alternative energy vehicles and encourage them to make any existing environmentally
friendly models in Australia.
The initiative caught the attention of Japanese car giant
Toyota, which is one of the many international automakers racing to offer more fuel-efficient models in the wake of fuel prices
hitting record highs around the world as well as increased environmental concerns. Toyota’s business plan is to reach a target of
selling 1 million hybrid cars by the early part of the next decade,
and to accomplish this goal, it needs to more than double production of the vehicles. The Japanese company was already building
its Camry hybrid in Japan, as well as in Kentucky in the United
States and in a joint venture factory in China. In 2008, thanks in
part to the strength of the Australian dollar, it had been weighing
an alternative plan to import engines to Australia from its Kamigo
plant in Japan.
In September 2010, after months of discussion, Toyota announced a $300 million upgrade of its plant in western Melbourne.
Under the investment, which has been partly funded by taxpayers
through a $63 million payment from the Green Car Innovation
Fund, as well as an injection of cash from the local Victorian
administration, the Altona engine plant was aiming to produce
100,000 hybrid engines and four-cylinder new generation engines
each year from the second half of 2012. The plan was that the
Australian-made engines would be exported into other countries
that manufacture Toyota’s Camry and Hybrid Camry.
Toyota’s more environmentally sustainable engines will consume 4.5 percent less fuel and produce 5 percent fewer greenhouse
gas emissions than the current equivalent. The Australian government claimed that the initiative would secure as many as 3,300
jobs, including existing direct and indirect jobs, and would anchor
Toyota’s operations in the country for years to come. According
to Toyota executives, the support provided by the Green Car
Innovation Fund was the major factor in the project going ahead
when they weighed it against other alternatives, including transferring production to the home market in Japan.
Thinking Globally
7-19. What do you think were the chief factors involved in
Toyota’s decision to undertake FDI in Australia rather than
build its hybrids in Japan?
7-20. Why do you think Toyota decided to adapt the existing
plant in Melbourne rather than build one from the ground
up elsewhere in Australia? List as many reasons as you can,
and explain your answer.
7-21. What do you think the decision to manufacture in
Australia rather than in its domestic factories will do to
the company’s reputation at home? How much attention
do international customers pay to the location where their
automotives are assembled?
7-22. What do you see as the pros and cons of Toyota’s approach
to managing FDI?
Sources: “Japanese Auto Manufacturers in the Australian Market and the
Government Industry Assistance Spending” The Otemon Journal of Australian
Studies, 34, 2008; “Toyota Plant to Deliver Greener Engines” Drive website
(www.drive.com.au), September 10, 2010; “Review of Australia’s Automotive
Industry” Australian Policy Online website (www.apo.org.au), July 22, 2008.
THE fDi REPORT 2018
Global greenfield investment trends
T
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THE fDi REPORT 2018
Editor’s
comment
EDITOR’S COMMENT
1
“Capital doesn’t play politics” is an idiom
that was cited – heckled, actually – at me by
a group of US business executives during
a recent discussion of potential impacts of
the US president’s protectionist policies on
the US and global economy.
Looking at the FDI statistics from the
past year, it is true that countries with
governments branded as populist, such as
the US and Poland, to name just two, are
not putting off investors. Quite the opposite,
as Poland is coming off a bumper year for greenfield investment
levels and the US remains a global FDI leader. Other countries
where politics are fractious and outsiders have raised concerns
about rule of law, such as Romania, also had successful FDI years
in 2017. Israel, always at the centre of geopolitical tensions, had a
record year as far as our fDi Markets database reflects.
So, indeed: capital doesn’t mind so much about politics or
rhetoric. But it does care about policy. The markets reacted fiercely
to Donald Trump’s launching of an opening salvo in a longthreatened trade war with China through the imposition of steel and
aluminium tariffs. Capital markets are, of course, much more volatile
and reactive than greenfield FDI, which by its very nature is a longer
term, more stable creature. What greenfield investors have seen so
far in the way of FDI-related policies from the Trump administration
they largely like: tax reforms will only enhance the US’s FDI appeal
as will red-tape slashing regulatory reforms. To the extent that the
US’s trade policy becomes unstable or protectionist in a way that
does not favour corporate interests (and a trade war most certainly
does not), then the knock-on effects on FDI might come. Trade and
investment have an incestuous relationship.
This we are seeing most visibly with the UK, which has
rebounded somewhat from the dramatic drop in greenfield
FDI that was experienced immediately after the referendum to
leave the EU in 2016 but nonetheless witnessed a second year
of decline after previously being among the world’s most reliable
FDI performers. Access to markets and the UK’s future trade
arrangements are top of the list of the uncertainties impacting
UK FDI.
Disruptions to the trade status quo helped drag down global
greenfield FDI levels in a year that was expected to be a more
positive one for FDI, as Dr Henry Loewendahl writes in our
Executive Summary on page 2. And continued question marks
lingering around major international trade pacts have the potential
to hinder an FDI uptick in 2018 as well. Just as 2017 saw a
decoupling of the usually solid union between global GDP growth
and FDI, the next years will be dominated by the rocky relationship
between trade and FDI.
It is true that countries with
governments branded as populist,
such as the US and Poland, to
name just two, are not putting
off investors
Courtney Fingar is editor-in-chief of fDi Magazine and head of
content for fDi Intelligence, the Financial Times’ specialist unit
dedicated to foreign direct investment
THE fDi REPORT 2018
2
EXECUTIVE SUMMARY
Global GDP growth and FDI levels go their
own separate ways in 2017
by Dr Henry Loewendahl, CEO, Wavteq
FDI is very closely correlated to
GDP, with market-seeking motives
the key driver for global investment. Previous editions of The fDi
Report have demonstrated this correlation,
for example by showing how rapid GDP growth
in India has been accompanied by record
levels of FDI flowing into the country. We
would therefore expect strong world
economic growth in 2017 to have been
reflected in a growth of FDI. This did not
happen.
According to data from Unctad, official FDI
flows declined by 16% in 2017 to an estimated
$1520bn, pulled down by a 23% decline in
M&A. fDi Intelligence data on greenfield FDI,
as presented in this report, showed a similar
decline of 15.2% in capital investment and an
accompanying 9.4% decline in global job
creation from FDI.
Why did global FDI decline in 2017 just as
world economic growth picked up? One explanation is that foreign investors did not expect
world growth to be as strong as the 3.7%
achieved in 2017, with some countries, such
as Turkey, smashing expectations by achieving 7%-plus growth. Foreign investors also
held back on FDI plans in the UK due to Brexit,
with a 4.5% decline in greenfield capital investment in the UK in 2017 following on from a
38.1% decline in 2016. Political uncertainty
over global trade, not only with Brexit but also
with the US pulling out of the Trans-Pacific
Partnership (TPP), renegotiating the North
American Free Trade Agreement (Nafta), and
taking a generally hawkish view on global
trade, has also created significant uncertainty
for location decisions – especially in
export-oriented industries that are dependent
on free-market access. The other big factor in
the decline of FDI in 2017 was Chinese FDI
policy, with the reimposition of controls on
overseas FDI which curtailed FDI in certain
targeted sectors.
The breaking of correlation between GDP
and FDI creates considerable uncertainty as to
the prospects for FDI in 2018. World economic
growth is forecast to accelerate to 4% growth
in 2018, which should drive up global FDI
volumes, especially after the decline of FDI in
2017. The dramatic cut in US corporate
income tax should also spur FDI as companies
have more firepower to make investments
and the US becomes more attractive for FDI.
Forecasts
Crossborder M&A will
accelerate rapidly in 2018,
while uncertainty over
trade policy will hinder
growth in greenfield FDI.
However, global trade policy is the big
uncertainty. The outcome of Brexit and Nafta
negotiations are still unknown. The US is
implementing tariffs to protect strategic
industries from what it deems as unfair
competition. The impact on FDI into the US
(and other Nafta countries, assuming the
agreement holds) is likely to be positive as
FDI becomes more attractive relative to
exports, while the impact on FDI to countries
exporting to the US and being hit by tariffs is
likely to be negative. At the same time, the
EU-Canada Comprehensive Economic and
Trade Agreement is likely to increase
EU-Canada FDI flows while TPP is likely to
increase intra-Pacific FDI, although in both
cases the impact may take several years to
filter through.
With strong world economic growth prospects, burgeoning corporate coffers and rapid
technological change, its seems very likely
that crossborder M&A will accelerate rapidly in
2018, while uncertainty over trade policy will
hinder growth in greenfield FDI. We therefore
expect that overall FDI flows will grow strongly
in 2018, driven by M&A, while greenfield FDI
moves into positive but slow growth.
THE fDi REPORT 2018
The big numbers
Headline FDI flows
declined by
16%
in 2017 to an estimated
$1520bn
pulled do
wn by a
23 %
decline in
M&A
Greenfield FDI
showed a decline of
15.2 %
in capital investment and
9.4 %
in job creation from FDI
UK FDI saw a
4.5%
decline in greenfield capital
investment in 2017
Foreign investors did not
expect world growth to
be as strong as the 3.7%
achieved in 2017
ANALYSIS
3
THE fDi REPORT 2018
4
GLOBAL OVERVIEW
Global overview
In 2017, greenfield FDI weakened with the number of FDI projects
declining by 1.1% to 13,200. Capital investment decreased 15.2% to
$662.6bn alongside a 9.4% decline in job creation to 1.83 million.
India was replaced by the US as the highest ranked country for
FDI by capital investment, with $87.4bn recorded, boosted by major
announcements from Foxconn and Saudi Basic Industries to invest
billions in single plants. The US was also the highest ranked country
for FDI by number of projects, recording 1627 announcements.
Western Europe was the leading destination region for FDI in
2017 by number of projects, with 4208 announcements. However,
Asia-Pacific received the largest amount of capital investment in
2017, with $196.6bn-worth of FDI recorded.
Western Europe was the leading source region for FDI in 2017,
with 6270 FDI projects recorded. This accounted for 47.5% of all FDI
globally and $237.8bn in capital investment.
Global overview
2017 FDI snapshot
Top source country
US**
Total capital investment ($bn)
$662.6bn*
Total Projects
13,200
Top sector
Coal, oil and natural gas**
Key trends in 2017 include:
• The US reclaimed its top spot from India, recording $87.4bn of
announced FDI in 2017.
• FDI into western Europe increased 4% by number of projects and
13% by capital investment.
• FDI into the UK declined across all three indicators: project
numbers (-10%), capital investment (-5%) and jobs created (-11%).
• China regained its FDI crown in Asia-Pacific, accounting for 26% of
capital investment in the region.
• Poland continued to rise as a key destination for FDI, with the
number of FDI projects increasing 24% and capital investment
increasing 49%.
Total jobs created
1,836,094*
Top destination country
US**
Source: fDi Markets
* Includes estimates
** by capital investment
THE fDi REPORT 2018
6
ASIA-PACIFIC
Asia-Pacific
Graph 1
Table 1
FDI INTO ASIA-PACIFIC IN 2017
FDI INTO ASIA-PACIFIC BY
PROJECT NUMBERS IN 2017
Capital investment
Country
Key trends in 2017 include:
• FDI into Asia-Pacific decreased 11% in 2017 with 3514 projects
announced. Capital investment and jobs created declined 44%
and 30%, respectively.
• China emerged as the top destination for FDI in Asia-Pacific with a
total of 681 projects in 2017, gaining an overall market share of 19%.
• China is the market leader for FDI by capital investment in AsiaPacific with a total of $50.8bn of announced investment.
• India dropped to second place with a total of 637 projects in
2017. However, the country topped the table for job creation in
2017, with 161,445 jobs announced.
• Singapore saw a significant rise in the amount of capital
investment received, with an increase of 36% from $11.3bn in
2016 to $15.4bn in 2017.
• Capital investment into Hong Kong increased by 9% to $5.8bn.
• Australia ranked fourth for FDI by number of projects, witnessing
a 6% growth.
• China retained its top position as the largest source of outward
capital investment in Asia-Pacific with $53.2bn in outward
investment. Japan ranked a close second, with outward investment
measuring $47bn.
• Japan generated the highest number of outward projects,
totalling 760, followed by China in second place with a total of 591.
Asia market
share %
Capital investment
($bn) 2017
26%
China
50.8
13%
India
25.1
10%
Vietnam
20.3
8%
Singapore
15.4
8%
Australia
15.3
5%
Indonesia
9.6
4%
Kazakhstan
7.0
3%
Malaysia
5.8
3%
Hong Kong
5.8
3%
Japan
5.6
18%
Other
36.0
Source: fDi Markets
Note: Includes estimates
China
India
Singapore
Australia
Vietnam
Japan
Hong Kong
Malaysia
Philippines
Indonesia
Other
Total
Projects 2017
% change
681
637
354
332
219
202
161
122
113
112
581
3514
-4%
-21%
3%
6%
-17%
16%
-2%
-31%
-28%
0%
-19%
-11%
Source: fDi Markets Note: Percentages rounded up/down
$53.2bn
China retained its top position as the largest source
of outward capital investment in Asia-Pacific with
$53.2bn outward investment. Japan ranked a close
second, with outward investment measuring $47bn
THE fDi REPORT 2018
Table 2
Table 3
FDI OUT OF ASIA-PACIFIC
BY CAPITAL INVESTMENT
($BN) IN 2017
FDI OUT OF ASIA-PACIFIC BY
PROJECT NUMBERS IN 2017
Capital investment
2017 ($bn)
Country
China
Japan
South Korea
Taiwan
Singapore
Hong Kong
India
Australia
Malaysia
Azerbaijan
Other
Total
53.2
47.0
27.6
16.6
14.8
11.7
9.4
7.0
4.6
3.7
7.5
203.1
Recent major projects
Projects 2017
Country
Japan
China
India
Australia
South Korea
Singapore
Hong Kong
Taiwan
Malaysia
Thailand
Other
Total
760
591
262
224
200
178
148
93
52
43
120
2671
Japan generated the
highest number of
outward projects
in the Asia-Pacific
region, totalling 760,
followed by China in
second place with a
total of 591
Source: fDi Markets
Source: fDi Markets
Note: Includes estimates
KEY TRENDS IN 2017
19%
China emerged as the top destination
for FDI in Asia-Pacific with a total of 681
projects in 2017, gaining an overall
market share of 19%
FDI into Asia-Pacific decreased by
11% with 3514 projects announced.
Capital investment and jobs created
declined 44% and 30%, respectively
11%
ASIA-PACIFIC
7
36 %
Singapore saw a significant rise in
the amount of capital investment
received, with an increase of 36% from
$11.3bn in 2016 to $15.4bn in 2017
Samsung Semiconductor, which
manufactures semiconductors and
is a subsidiary of South Koreabased Samsung, will invest $7bn to
expand its chip production capacity at
its plant in Xi’an, China. The plant will
produce advanced flash memory chips.
Tianjin Bohua Petrochemical, a
subsidiary of China-based Tianjin
Bohai Chemical Industry Group, is to
invest $4bn to construct a new factory
in the Aqtobe region of Kazakhstan. It
will have a production capacity of 1.8
million tonnes of methanol from natural
gas and is set to become operational in
2020.
Japan-based Sumitomo Group, a
multi-national trading company, is
to invest $2.58bn to develop a coal-fired
thermal power plant in Van Phong
Economic Zone, Ninh Hoa, Vietnam.
Construction on the plant is set to begin
later in 2018 and will have an output of
1320 megawatts.
Samsung Display, which operates
as a subsidiary of South Koreabased Samsung, is to invest a further
$2.5bn to expand its production facility
in Bac Ninh, Vietnam.
THE fDi REPORT 2018
8
EUROPE
Europe
Graph 1
Table 1
FDI INTO EUROPE IN 2017
FDI INTO EUROPE BY PROJECT NUMBERS 2017
Capital investment
Country
UK
Germany
France
Spain
Poland
Netherlands
Russia
Ireland
Belgium
Romania
Other
Total
Key trends in 2017 include:
• FDI into Europe increased by 14% in 2017, with a total inward
capital investment of $183.9bn. Project numbers increased by 5%
and jobs created increased 12% to 578,638.
• The total number of FDI projects into western Europe increased
by 4%, while capital investment grew by 13%, from $106.2bn in
2016 to $120.2bn in 2017.
• FDI into Emerging Europe increased across project numbers
(8%) and capital investment (17%), yet retained only 25% of total
market share for projects.
• Although the UK topped the tables for FDI in 2017, it
experienced a 10% decline in project numbers from 1042 in 2016
to 939 in 2017. Capital investment into the country also fell by 5%,
from $34.8bn in 2016 to $33.2bn in 2017.
• FDI projects into Luxembourg grew from 19 in 2016 to 42 in
2017, a growth rate of 121%.
• The number of FDI projects into Poland increased 24% to
338, ranking it fifth as a destination market for FDI into Europe.
The country ranked top for FDI by job creation in 2017 with an
increase of 53%.
• In 2017, Lithuania welcomed 61 new investment projects, a
27% increase from the previous year.
• Total FDI into Romania rose by 40% in 2017, an increase of 44
projects from the previous year.
Europe
market share %
Capital investment
($bn) 2017
18%
UK
33.2
9%
Russia
15.9
8%
Poland
14.8
8%
Spain
13.9
7%
Germany
13.7
7%
France
13.4
7%
Netherlands
12.8
4%
Turkey
7.8
4%
Ireland
7.8
3%
Romania
5.8
24%
Other
44.9
Source: fDi Markets
Note: Includes estimates
Projects 2017
% change
939
766
696
385
338
261
203
199
165
155
1502
5609
-10%
-24%
48%
19%
24%
26%
2%
6%
19%
40%
8%
5%
Source: fDi Markets Note: Percentages rounded up/down
339%
Russia ranked second in terms of outbound
capital investment, a significant 339% increase
from 2016, climbing six places in the tables and
pushing the UK down to third place
THE fDi REPORT 2018
Table 2
Table 3
FDI OUT OF EUROPE BY
CAPITAL INVESTMENT
($BN) IN 2017
FDI OUT OF EUROPE BY
PROJECT NUMBERS IN 2017
Capital investment
2017 ($bn)
Country
Germany
Russia
UK
France
Italy
Netherlands
Spain
Switzerland
Luxembourg
Finland
Other
Total
53.9
37.4
32.3
23.7
20.7
17.5
17.1
16.1
10.7
9.0
48.1
286.5
Recent major projects
Projects 2017
Country
Germany
UK
France
Switzerland
Netherlands
Spain
Sweden
Italy
Luxembourg
Denmark
Other
Total
1353
1262
712
515
393
357
289
251
212
171
1172
6687
FDI into Emerging
Europe increased across
project numbers (8%)
and capital investment
(17%), yet retained only
25% of total market
share for projects
Source: fDi Markets
Editor’s note: Our German data sources have not
released all 2017 data yet so 2017 data for Germany
in this report is underestimated.
Source: fDi Markets
Note: Includes estimates
EUROPE
9
KEY TRENDS IN 2017
121%
Although the UK topped the tables for
FDI in 2017, it experienced a 10% decline
in project numbers from 1042 in 2016 to
939 in 2017. Capital investment into the
country also fell by 5%, from $34.8bn in
2016 t...
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