Chapter 5

Foreign Direct Investment (FDI) and transnational Corporations of Service Industry

5.1 Overview of FDI and Transnational Corporations in

Service Industry

• 5.1.1 FDI of service industry• What’s Foreign direct

investment ?

Foreign direct investment scale in service industry

1

Regional differences of FDI in service industry

2

Industrial characteristics of FDI in service industry

3

Liberalization of FDI in service industry

4

Foreign direct investment scale in world

The proportion of Service industry in GDP

FDI in service industry in China in 2007

The flow of FDI in service industry in China in 2013

Regional differences of FDI in service industry

• developed countries dominate over transnational direct investment

• USA, the EU

• Transnational FDI in developing countrie

• s is basically 1/3 of that of the world

South Asia, East Asia and the Caribbean region of Latin American.

Industrial characteristics of FDI in service industry:

finance-related and trade-related service industry are dominant

Merger and acquisition

• 5.1.2 Transnational corporations in service industry

Investment of manufacturing transnational companies in service industries

• Transnational corporations in service industry

• 1)Management internationalization

• 2)Business diversification

3)Development imbalance

• 4) Technology diffusion driven by transnational corporations in service industries

5 ） Frequency in mergers and acquisitions of transnational

corporations in service industries

• 6) Strategic changes guided by transnational corporations in service industries

• 5.2 Theoretical analysis of reasons for development of FDI and transnational corporations in service industry

Contents ReviewWhy the transnational corporation in

manufacturing and service industry could initiate FDI?

• External factor• Internal factor

External Factor

CapitalLaborNatural resources

goods

Producing country

AllKinds of trade barriers

transport costsinsurance expenses taxation

Country of consuming

consumers

External Factor

capital

capital export country A

Capital outflow

Goods

CapitalNatural resourceslabor

consumers

Capital import country B

• Theory of monopolistic advantage• Theory of product life cycle (PLC)• Theory of internalization• Eclectic theory of international

production

Internal factor (Determinant )

Theory of product life cycle (PLC)

Eclectic theory of international production

• the reasons for development of FDI and international enterprises

• Ownership-special advantages• Locational-choice advantage • Internalization advantages

5.3 Organizational forms of transnational corporations in service

industry

Non-equity cooperation1

Equity cooperation2

Key Point

Presentation

• Group work: (3-4 persons)• Choose one multinational company r

elated to service industry.• Including: brief introduction, organiz

ational structure, business scope, organizational form, finance and business situation after M&A.

Organizational forms

• Non-equity cooperation• Equity cooperation

Case study

Non-equity cooperation

• It means enter target market by contractual transfer of one or more intangible assets on condition that equity or corporate property right is not involved.

• Franchise• Potential franchiser—possess

famous commodity, trade mark and technology.

• Potential franchisee—money

For example

Franchiser Franchisee

Pay money

product and trademark

franchising contract

• Franchise allow franchiser to carry out international business with less input; (McDonald’s)

• Enable franchisee to introduce mature brand, managerial experience without taking risks.

Advantages

Disadvantage• Difficult pricing of brand and

management• Creates potential rivals• It is possible to suffer losses due to

secrets disclosure CocaCola corporation

Equity cooperation largely new establishment

• Equity investment mergers& acquisition It means that FDI investors carry out business

in target country through full or partial participation, such as overseas branches, foreign affiliates and offices.

东京迪士尼

巴黎迪士尼

上海迪士尼

Advantage & Disadvantage Merits:★ Realization of internalized

transaction of intangible assets through sharing information and resources inside transnational corporation system

★ minimize market failure caused by information asymmetry

★ avoid difficult pricing of brand and management

★ avoid losses due to secrets disclosure

★ No huge threat to investor

Demerits:★ big cost of direct

investment

How to choose?

• Trade-off

1. The comparison between relative cost and gains.

Equity investment cost: capital needed for investment, the risk of losing capital, managing and monitoring foreign equity investment.

• The risk of non-equity investment: The cost of transaction property

including searching for appropriate contractual partner, price, specifications for services provided, number and time delivery.

2. The degree and types of governmental interventions, including direct administrative intervention, policy measures such as tax and tariff.

• The choice of different forms by service enterprise is influenced by the governmental policy orientation.

• For example, if a country’s foreign capital of service industry is under rigid control, the enterprise tends to use non-equity forms such as offices.

• If the control is loose, equity investment appears.

5.4. Effects of FDI and transnational corporations in service industry

Effects on the world economy1

Key Point

Effects on parent country and host country

2

• Effects on the world economyPlay important promotional

roles for development of global service industries

Intensify market integration and corporate reshuffle of global service industries

• (2) Effects on parent country and host country

• On parent country

• On host country• Dual influence • 1) Spillover effect• 2) Introversive effect