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MGT520 - International Business - Lecture Handout 31

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FOREIGN DIRECT INVESTMENT

Foreign Direct Investment in the World Economy:

  1. When discussing foreign direct investment, it is important to distinguish between the flow of FDI and the stock of FDI. The flow of FDI refers to the amount of FDI undertaken over a given time period (normally one year). The stock of FDI refers to the total accumulated value of foreign owned assets at a given point in time.
  2. Figure 6.1 illustrates the great increase in the flows of FDI between 1992-2001. The significant growth in FDI has both to do with the political economy of trade as outlined in the previous chapter and the political and economic changes that have been taking place in developing countries.
  3. The opening case on Starbucks helps illustrate one very important trend in FDI - the globalization of the world economy is causing firms to invest worldwide in order to assure their presence in every region of the world.
  4. Another important trend is has been the rise of inflows into the US. The stock of foreign FDI in the US increased more rapidly than US FDI abroad.
  5. The rapid increase in FDI growth into the US may be due to the attractiveness of the US market, the falling value of the dollar, and a belief by some foreign corporations that they could manage US assets and workers more efficiently than their American managers could.
  6. It is difficult to say whether the increase in the FDI into the US is good for the country or not. To the extent that foreigners are making more productive use of US assets and workers, it is probably good for the country.
  7. Figures 6.2, 6.3, 6.4 and 6.5 provide some insight into the countries that have been the major recipients and sources of foreign direct investment in recent years.
  8. The management focuses box details the techniques of Mexican cement manufacturer Cemex for its aggressive international expansion of cement manufacturing. Because cement is a product that is not easily exported due to its low ratio of value to weight, Cemex sought international expansion by acquisition.

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MGT520 - International Business - Lecture Handout 10

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NATIONAL DIFFERENCES IN POLITICAL ECONOMY

Legal Systems:

  1. The legal environment of a country is of immense importance to international business. A country's laws regulate business practice, define the manner in which business transactions are to be executed, and set down the rights and obligations of those involved in business transactions. Differences in the structure of law can have an important impact upon the attractiveness of a country as an investment site and/or market.
  2. Control over property rights are very important for the functioning of business. Property rights refer to the bundle of legal rights over the use to which a resource is put and over the use made of any income that may be derived from that source. Property rights can be violated by either private action (theft, piracy, blackmail, Mafia) or public action (governmental bribery and corruption, nationalization). Lack of confidence in a country’s fair treatment of property rights significantly increases the costs and risks of doing business.
  3. The Country Focus on Corruption in Nigeria shows how a country that has huge natural resources can still remain poor when its political leaders conspire to damage its economic activity for their personal gain. High levels of corruption can naturally lead to a significant reduction in economic activity.
  4. Intellectual property rights (patents, copyrights, and trademarks) are important for businesses if they are to capitalize on what they have developed. Firms like Microsoft, Levis, Coca-Cola, or McDonald’s would have little reason to invest overseas if other firms in other countries were able to use the same name and copy their products without permission. The management focus article on drug patents in South Africa illustrates the issue well. By allowing the purchase of AIDS drugs from the cheapest source, the South African government was attempting to avert a health crisis. In doing so, it created a violation of international property rights that may take many years of court action to settle.
  5. Different countries have different product safety and liability laws. In some cases US businesses must customize products to adhere to local standards if they are to do business in a country, whether these standards are higher or just different.
  6. When product standards are lower in other countries, firms face an important ethical dilemma. Should they produce products only of the highest standards even if this puts them at a competitive disadvantage relative other producers and results in not maximizing value to shareholders? Or should they produce products that respond to local differences, even if that means that consumers may not be assured of the same levels of safety in different countries? One serious example I use involves the flame retardant nature of children’s pajamas. In many countries restrictions on the level of flame retardency are very low and even nonexistent, and it is perfectly legal to manufacture that product without protective standards. Should international firms continue to manufacture to higher protection levels, with resulting increased costs that may put them at a competitive disadvantage?
  7. Differences in contract law force firms to use different approaches when negotiating contracts. In countries with common law traditions, contracts tend to be much more detail oriented and need to specify what will happen under a variety of contingencies. Common law tends to interpret legal statutes according to the past decisions and rulings of courts. The United States uses a common law system. Under civil law systems, contracts tend to be much shorter and less specific since many of the issues relating to contracts are covered in the civil code of the country. Under common law, ownership is established by use; under civil law, ownership is determined by registration. Therefore, another firm may register a product first and prevail in a bid for ownership, even though the competition had been using the product for a long time but had failed to register it.

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