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1、Lesson 2,International Investment:Theory and Practice,Lesson 2International Investment,Reading:Chap.3,Book 1;Chap.2&3,Book 2Overview:Foreign Indirect Investment vs.FDIInvestment vs.SpeculationMotives for Making FDIOrganizational Forms of Multinational EnterpriseCharacteristics of the Multinational E
2、nterpriseModern Theories of FDI and MultinationalsPorters Diamond ModelCases:Nestls Global Drive A Global Challenge for Kodak Aflacs Success in Japan,2.1 The Scope of International Investment,2 types:(1)Foreign Indirect Investment(FII)orInternational Portfolio Investment Investing on international f
3、inancial assets.e.g.foreign bonds or stocks(2)Foreign Direct Investment(FDI)Establish joint venture or subsidiary Note:FII can be transformed into FDI.Under what condition?The shareholding of a company exceeds 10%of its stock in most cases.2.1.1 International Portfolio InvestmentQ:How do investment&
4、speculation differ?Any example?,Look at great investors&speculators,Find the differences between investment&speculation Warren Buffett George Soros“God of Stocks”“Greatest Money Manager”,Q.How do Investment&speculation differ?,(1)Targets:Mainly stable income v.s.profiting from price changes(2)Strate
5、gies:Long-lasting war v.s.quick battles(3)Tools:Fundamental analysis v.s.technical analysis(4)Style:Prudent(稳健的)v.s.aggressive(激进的),2.1.2 Foreign Direct Investment(FDI),FDI is made to establish(a)International ownership&control:Establish joint venture or subsidiary(b)Multinational OperationsCase:Nes
6、tls Global Drive(1)How does Nestl display basic characteristics of the Multinational Enterprise(MNE)?(2)Whats the motive for Nestl to invest in other countries?Generally speaking,what are different motives for the MNEs to make FDI?Explain.,(1)Basic characteristics of the MNE,Monopolistic advantage I
7、t is derived from certain proprietary intangible assets,such as superior managerial skills,patented and unpatented innovations.International ties of common ownershipIt enables the parent and its subsidiaries to draw on a common pool of resources such as patents,trademarks,research facilities,informa
8、tion and human capital.Transnational intrafirm trade More than 60%of world trade takes place within multinational enterprises.,(2)Whats the motive for Nestl to invest in other countries?In general,what are different motives for the MNEs to make FDI?,Motives:To seek(1)market;(2)cheap labor;(3)raw mat
9、erials;(4)information and technology;(5)free trade;(6)tax reduction.,2.2 Organizational Forms of the MNE,Does MNE or MNF differ from MNC or TNC?MNE(Multinational enterprise),MNF(Multinational firm)MNC(Multinational Corp.)TNC(Transnational Corp.)The Multinational Enterprise(MNE)can take any of the fo
10、llowing legal forms:Sole Proprietorship:One owner with unlimited liability Partnership：Multiple owners with unlimited liability Corporation：Stockholders with limited liabilityOperational organization in foreign countries can be:Branch:No independent legal status.Subsidiary:Independent legal entity e
11、ntitled to issue its own stock and bonds.Q：Is there an one-person-corporation,i.e.,shareholding company?,Caribbean海上的英属维尔京岛国(BVI),BVI on the Caribbean Sea,A corporation set up there a.pay no taxes;b.can have only one shareholder;c.can have one board member;d.neednt issue an annual report;e.can use a
12、ny currency for registration;f.can use any amount for registered capital.,Case Study,Aflacs Success in Japan Discussion Questions:1.Based on Aflacs experience,what conditions should a firm have to make foreign direct investment in a foreign country?2.Can its success be duplicated in China?,Case:Afla
13、c in Japan,American Family Life Insurance of Columbus founded in 1955.Now its the worlds leading seller of cancer insurance,and one of the most successful foreign companies in Japan.Founders:John Amos Between 1990 and 2002,the subsidiary repatriated over$1 billion to the parent company.,Digression:B
14、asic FDI Theories,(1)FDI Advantage Hypothesis Seminal analysis of the MNF by Stephen Hymer(1960),who introduced industrial organization theory(IOT)to the study of FDI.IOT explains firms performance under different market structures.Q.Whats the basic problem of making FDI?ForeignnessFirms proprietary
15、 assetFirm-specific advantage compete against local firmsmake FDI,(2)Internalization Theory,Peter Buckley B、The MNF is the result of internalizing markets across national borders.,(3)OLI Advantages Theory,According to John H.Dunning,The MNC must have three advantages:(i)Ownership advantage:a proprie
16、tary asset to give it firm-specific advantage(ii)Location advantage:favorable investment conditions as country-specific advantage(iii)Internalization advantage:Internalization of the proprietary asset across national borders can best realize its full value.,Case:Aflac,Q.1.Based on Aflacs experience,
17、what conditions should a firm have to make FDI?Answer:1.(1)Ownership Advantage:The firm possesses proprietary knowledge(2)Location Advantage:Japan is a well-developed economy.Income and purchasing power are high.Besides,in-house sales subsidiaries in Japanese corporations can be set up to handle ins
18、urance sales.(3)Internalization Advantage Aflac cannot realize full value of its proprietary asset through market transactions like franchising.,2.Succeed in China?Application:Porters Diamond Model,Government,Chance,Factor Conditions,Related&SupportedIndustry,Demand Conditions,Firm Structure,Strateg
19、y&Rivalry,Porters Diamond Model Applicable to China,Firm Structure&Rivalry（in-house sales subsidiaries,allowed,efficient foreign insurers,intense competition）,Related&Supported Industry（fast-developing financial industry,more investment channels,rapid expansion of foreign banks）,Factor Conditions（pl
20、enty human resources,low cost,good infra.modern communication,Demand Conditions（more civilian-run firms,risingincome,medical system reformcredible foreign insurance）,Government,Chance,Case:Aflac,Q(ii)Can its success be duplicated in China?Compare:Factor conditions:+Firm structure&rivalry 0Demand:+Su
21、pporting industries:+Government:-Chance:+On the whole,there are location advantages.In addition,Aflac has a proven business model.Thus,success is very likely.,Theoretical Issue:FDI as a Currency Area Phenomenon,According to Aliber,a financial economist:Foreign direct investment is a currency area ph
22、enomenon.Firms in countries with strong currencies have a currency-area advantage.They can acquire foreign firms and production facilities at low costs in countries with weak currencies.,Q.In 1950s and 1960s the dollar was quite,strong,and U.S.made substantial FDI in Europe and other countries.Durin
23、g the 1970s and early 1980s,German mark and Japanese yen were appreciating,and there were extensive German and Japanese outward investments and the invasion of the U.S.by European MNFs.Given this development,Alibers theory seems to explain well the direction of MNFs investment in the post-war world.
24、But Alibers theory has never been widely accepted,why?,Why not widely accepted?,Its drawbacks:(1)FDI is a long-term strategic commitment while current currency value is a short-term phenomenon.Relying on the short-term market bias to account for the long-term decision making is not logically convinc
25、ing.（2）It is inadequate to explain cross-investment between currency areas.,Case：A Global Challenge for Kodak,(p12,Book 1)Kodaks crisis:In early 80s,Fuji had control over 70%of domestic film market,and started an aggressive expansion into north America and European markets,which threatened Kodaks do
26、minant position there.Worse yet,Fuji undercut prices,and captured large market share,Kodaks profit sagged.(1)What mode of entry did Kodak use for Japanese market prior to 1980s?Why?(2)What strategy did Kodak adopt to counterattack Fujis aggressive expansion into North America markets?Why?(3)How can
27、Kodak thrive in the new era of digital cameras?,(1)Licensing.Kodak underestimated Japanese rivals,(2)From licensing to export+joint venture strategySet up joint venture with a Japanese distributor,establish its distribution and marketing channel,and spend heavily on promotion.Reasons for the Strateg
28、ic Change：a.Exports+FDI can bring in more profits than licensing；b.Offense is the best defense.Outcome:Kodak had great success in Japan.In 1990,its sales in Japan reached$1.3 billion.Fuji had to defend its home market,and withdrew a group of best senior executives from abroad.(3)Be a leader in digit
29、al cameras,or diversify its biz?,Recapitulation:,International Portfolio Investment differs from FDI;Investment and speculation have different characteristics;MNE can take various legal organization forms;Main motivations for FDI are seeking resources,markets,and efficiency;Mode of entry into a fore
30、ign market is an important strategic decision(Kodak);OLI advantages theory offers a guideline for making FDI decision;Porters diamond model provides a useful framework for evaluating location advantages.,Reminder:,“After the class discussion of the case,you can receive bonus points if a short report
31、 is submitted.It should compare analyses of the professor and others with yours.New ideas may also be provided.This report is not required,but you are encouraged to do so.”If you want to do the report,it should be submitted at the beginning of the next class.An electronic copy should also be sent to
32、 TA and my e-mail box before the next class.Note:Learning is an exciting journey of new discoveries!,Preparation for the Next Class,Topic:International Trade:Theory Chap.3&17,Book 2Content:Rationale of International TradeInternational Trade TermsRemittance&CollectionLetters of CreditCase Study:An Exchange between Tom&Huck Can Lee&Wang Help Each Other?An unexpected development What type of L/C is it?Note:Knowledge acquisition vs.skill acquisition There are tricks of trade!,
