Wendy Jeffus

Harvard Summer School

International Business

Introduction Administration

– Ethics Question (Submit Hard Copy to Brian)– July 8th Project Proposals

Friday’s Section John Harvard’s 1:00-3:30pm – Location: 33 Dunster Street, Cambridge, MA 02138 – www.johnharvards.com

Chapter 6 Slides World’s Largest Companies Participation Ranking “Foreign Direct Investment: Dubai” Case Study: Starbucks’ Foreign Direct Investment Case Study: Cemex’s Foreign Direct Investment Chapter 7: Foreign Direct Investment

Participation Ranking (Section 2)4) Nethra Muralidharan, Elena Ponomareva

3) Andrew Buks, Bernadette Almeda, Sweta Joshi

2) Madhu Varshi

1) Ulrich Suter, Umut Ozeren, Ipek Hizlikan

Participation Ranking (Section 1)4) Marc Burde, Juliana Nascimento,

3) Benedikt Bingler, Ayhan Sebin

2) Laurent Blumberg, Frank Dike, Stuart Haigh

1) Laura Vega Silva, Andre Da Silva, Monica Garcia de la Cadena

Dubai – Past & Present

1991 2005

Dubai – Burj al-Arab

Dubai – Palm and the World

Dubai – Burj Dubai

Dubai – Dubailand Ski Dome

Foreign Direct Investment 05/09 - The UAE expects to remain the main

recipient of foreign direct investment in the Gulf Arab region.

https://www.tradearabia.com/news/ECO_161892.html

Submitted by Andrew Buks & Kristin Johnson (Fall 2008)

Case Assignments Starbuck’s: FDI Cemex’s: FDI

Present a 5-10min (timed) assessment of the case.

All group members must participate.

Wendy Jeffus

Harvard Summer School

Chapter 7: Foreign Direct Investment

What is the definition of FDI? Foreign Direct Investment is cross-border

investment of greater than 10% (portfolio investment is less than 10% often in the form of stock and bonds).– The flow of FDI refers to the amount of FDI

undertaken over a given time period– The stock of FDI refers to the total accumulated value

of foreign owned assts at a given time– The outflows of FDI refer to the flow of FDI out of a

country– The inflows of FDI refers to the flow of FDI into a

country

Foreign Direct Investment fDi Intelligence recorded 15,551 greenfield FDI

projects worth about $1500bn in 2008, creating an estimated 4 million direct jobs and 12 million indirect jobs worldwide

http://www.zawya.com/story.cfm/sidZAWYA20090423111545

Which Country?

Which Country?Company Country

Nokia FinlandNovartis SwitzerlandPanasonic JapanPhilips NetherlandsPorsche GermanyPrada ItalyReuters BritainRolex SwitzerlandSamsung S. KoreaSAP GermanyShell Brit./Neth.Siemens GermanySmirnoff BritainSony JapanToyota JapanUBS SwitzerlandVolkswagen GermanyZara Spain

FDI Outflow (1998-2003)

Numbers are in $US billions (See Figure 7.4)

Global CompaniesCompany Country

Nokia FinlandNovartis SwitzerlandPanasonic JapanPhilips NetherlandsPorsche GermanyPrada ItalyReuters BritainRolex SwitzerlandSamsung S. KoreaSAP GermanyShell Brit./Neth.Siemens GermanySmirnoff BritainSony JapanToyota JapanUBS SwitzerlandVolkswagen GermanyZara Spain

Where to Invest? Theory versus Practice

The decision to invest abroad is often a stage in the firm’s development process.

Eventually the firm experiences a stimulus from the external environment, which leads it to consider production abroad.

Some important external stimuli are:– An outside proposal, from a quality source– Fear of losing a market– The “bandwagon” effect– Strong competition from abroad in the home market– Connections – familiarity with a market – personal interest

The Eclectic Paradigm John Dunning (1988) The Eclectic Paradigm (or OLI Paradigm) is an attempt to create an

overall framework to explain why MNEs choose FDI rather than serve foreign markets through alternative models such as licensing, joint ventures, strategic alliances, management contracts, and exporting.

– “O” owner-specific (competitive advantage in the home market that can be transferred abroad)

– “L” location-specific (specific characteristics of the foreign market allow the firm to exploit its competitive advantage)

– “I” internalization (maintenance of its competitive position by attempting to control the entire value chain in its industry)

Eclectic Paradigm (O-L-I)

Location Advantage:Location specific factors. These are external to the firm

including factor endowment, transportation cost, government regulation, and infrastructure factors.

OLI

Ownership Advantage:Firm specific factors including: technology,

patent, process, name recognition,and other core competencies.

Internationalization:Cost advantage from vertical and

horizontal integration, due to transactioncost caused by market failure

Microsoft transfers it’stechnology from home, abroad

France has government support for its wine industry.

The Japanese auto industry transfers it’s perception of quality

Forms of FDI Greenfield operations:

– Usually only when an appropriate target is unavailable.

Mergers and acquisitions:– Quicker to execute– Acquire valuable strategic assets– Believe in the ability to increase the efficiency of the

acquired firm.

A Key Point Mergers are marriages between firms.

– They can be dysfunctional, unequal, unfair, and can result in expensive break-ups.

– To have a successful merger 1) chose your partner wisely 2) communicate goals 3) have a good lawyer.

Photo source: “For Bank of America and Merrill, Love Was Blind” [1] http://www.bizjournals.com/baltimore/stories/2007/11/05/daily15.html[2] http://www.nytimes.com/2009/02/08/business/08split.html

Who’s “the Boss” BP/Amoco Merged in 1998

– A popular joke in Amoco hallways goes: What’s the British pronunciation of BP Amoco? BP – the Amoco is silent.

BP was a giant family of small businesses– London, glass walls, “peer groups,” and hard targets.

Amoco operated under a classic pyramid with heavy internal bureaucracy.

– Chicago, closed doors, “aspirations,” strategic planning counsels, and strict policies

They even spelled organization and labor differently!

Market Imperfections Market imperfections are factors that inhibit

markets from working perfectly– Regulations– Tariffs– Quotas– Transportation costs– Management experience– Lower labor costs

Toyota (Japan)Decision to invest inthe US due in partto quotas on imports.In addition, believed“lean production”was hard to replicate.

P&G (U.S.) moved some of its back-office accounting to the Philippines

Dell (U.S.) call centers in India

IBM & Microsoft (U.S.) have software development in India

Foreign Direct Investment Horizontal FDI - investment in the same industry

– Cemex (Mexico’s largest cement manufacturer acquired RMC (cement firm in Britain)

Vertical FDI – – Backward Vertical “upstream” - investment in inputs (i.e. suppliers).

Popular in oil, bauxite, & mining industries– Forward Vertical “downstream” investment in outputs (i.e. customers)

Volkswagen bought dealers in the US

Licensing Licensing is basically selling “know-how” (i.e.

technology, brand, etc.)

Licensing vs. FDIChoose FDI when…

– Need to protect know-howRCA licensed its color TV technology to

Matsushita and Sony (oops).

– Want tight controlKodak wants its Japanese subsidiary to keep Fuji

busy.

– Think others can’t replicate your competitive advantage.

Toyota thinks foreign companies don’t get it.Photo source: Company websites

Franchising Franchising is the service industry’s version of licensing.

– McDonald’s chooses franchising because… Fast-food can’t be exported Economizes on costs and risks of foreign business Brand is easier to protect (than technology, for example) Control can be communicated through contracts and company

visits.

Decision Making Grid For FDI

Political Ideology

RadicalView

PragmaticNationalism

FreeMarket

MNEs are instrumentsof imperialist domination

First, No Country has adopted the Radical or Free Market views in their pure forms

CubaVenezuelaIran

FDI benefits both countries“Come on In”

U.S.U.K.

Pragmatic Nationalism The pragmatic nationalist view is that FDI has

both benefits and costs– Allow FDI if benefits outweigh costs

Block FDI that harms indigenous industry Court FDI that is in national interest

– Tax breaks– Subsidies

Aberdeenshire, Scotland Aberdeenshire is a predominantly rural

area in the north east of Scotland. – Population: 236,300– Salary: Average gross weekly earnings

are £484.90. This is £18.80 lower than the Scottish

average and £121.40 lower than in Aberdeen.

– Unemployment: 1.0%. This is lower than the average rates for

Aberdeen City (1.6%), Scotland (2.8%) and the UK (2.6%).

Traditionally, it has been economically dependent upon agriculture, fishing, forestry and related processing industries.

Within the last 35 years, the emergence of the oil and gas industry and the development of the service sector have broadened Aberdeenshire’s economic base, leading to rapid population growth.

https://www.cia.gov/library/publications/the-world-factbook/geos/uk.htmlLatest figures (2006) Source: http://www.aberdeenshire.gov.uk/statistics/area/aberdeenshire_profile2007.pdf

Aberdeenshire, Scotland Menie Estate, close to the

North Sea near Balmedie.

Source: http://www.aberdeenshire.gov.uk/statistics/area/aberdeenshire_profile2007.pdf; http://www.meniehouse.com/find.asp; http://news.bbc.co.uk/1/hi/scotland/4862982.stm

X

Donald Trump “I have never seen such an unspoilt and dramatic sea

side landscape and the location makes it perfect for our development.” Donald Trump

March 2006 - The US billionaire announced plans to build a new world class golfing centre in Aberdeenshire.

The centre will include two championship courses, a hotel and a holiday home complex.

Mr Trump, speaking on his website, said: "I have been actively looking for links land in Europe for the past few years.

– "Of course my preference was Scotland over any other country because I am half Scottish - my mother, Mary MacLeod, is from Stornoway.

"When I saw this piece of land I was overwhelmed by the imposing dunes and rugged Aberdeenshire coastline. I knew that this was the perfect site for Trump International, Scotland.

http://news.bbc.co.uk/1/hi/scotland/4862982.stm

Trump in Scotland June 10, 2008 – “Donald Trump visited his mother's childhood home

yesterday on the Scottish Isle of Lewis, a pilgrimage that lasted as little as 97 seconds or as much as two minutes, according to the Guardian and the Glasgow Herald, respectively.””***

*http://news.bbc.co.uk/1/hi/scotland/4862982.stm**http://news.scotsman.com/uk/Golf-plans-threaten-change-of.4200208.jp***http://www.portfolio.com/views/blogs/daily-brief/2008/06/10/the-donald-gets-a-scottish-cheerPhoto source: http://www.nydailynews.com/news/us_world/2008/06/10/2008-06-10_donald_trump_vows_love_for_scotland_as_h-1.html

FDI in ScotlandBenefits to the host country Economic Development

– “The development could bring £150m to the local economy over the next decade, creating 400 jobs.”

First Minister Jack McConnell*– "This is an unbelievable tourism

opportunity for the region and, with Royal Deeside and castle and whisky trails on the doorstep, the overall visitor package will be tremendous.”

Ian Dunlop, area director for Visit Scotland*

Costs to the host country Environmental Concerns

– “will effectively destroy the "jewel in the crown" of Britain's shifting sand dune systems…the main championship course at Menie would involve "biblical amounts" of sand being moved at a protected site of "national" environmental importance.”

Dr Jim Hansom, expert on coastal research**

– Note: Trump rejected an alternative golf course design that environmental groups claimed would allow him to go ahead with his project without destroying the protected dune system at the Menie Estate.****

Heritage– "We are approaching it in a co-

operative manner, it has huge potential for the area and we recognise that, but we must protect the heritage.“

Scottish National Heritage (SNH) Grampian area manager Ron MacDonald*

*http://news.bbc.co.uk/1/hi/scotland/4862982.stm**http://news.scotsman.com/uk/Golf-plans-threaten-change-of.4200208.jp****http://www.cogolf.ca/news.php?readmore=242Sand dunes in the area are designated to be of “Special Scientific Interest (SSSI)”

Opposition Michael Forbes owns 23 acres on the Scottish cast that

Donald Trump wants and he’s offered $790K for the property.

– Forbes said no. Forbes noted, “[Trump] seems to think everything is for sale."

– A British businessman offered to pay more than $1.5 million for the land just to stand in Trump's way.

http://www.washingtonpost.com/wp-dyn/content/article/2007/12/06/AR2007120602387.html***http://www.portfolio.com/views/blogs/daily-brief/2008/06/10/the-donald-gets-a-scottish-cheer

We Don't

Want

You Hair

Don’t Comb Over Here

Locals armed with signs that read "We Don't Want You Hair" and "Don't Comb Over Here," questioned why it took so long for Trump to finally visit his mum's childhood home.***

Support Magnus Linklater is backing Donald Trump. He’s “backing his big ideas, his big ego, his big private jet, and his big

hairstyle” Linklater wants Trump “to win the argument for his £1 billion golf course, along with the 1,000 houses he is planning, and the five-star hotel, to be called, [he has] no doubt, Castle Trump.” Linklater says “I like the size, the scale, the sheer unadorned vulgarity of it all.”

– Opposition falls into two categories: innate suspicion of wealth and deep-dyed hostility to anything that threatens the environment.

– Three acronyms “strike terror into the heart of any developer” Scottish National Heritage (SNH), Royal Society for the Protection of Birds (RSPB) and Site of Special Scientific Interests (SSSI).

“I like thinking big,” Mr. Trump says. “If you're going to be thinking anything, you might as well think big.” Love him or loathe him, you cannot fault him on consistency.- Magnus Linklater

The three miles that Mr. Trump would like to commandeer constitute but a tiny and deserted percentage of the total (sand dunes). Since he took an interest, however, (they are) no longer just sands, they are described as “unspoilt dune ecosystems”, or “mobile dune vegetation”, the “crown jewels” of “our most precious habitat”…

http://www.timesonline.co.uk/tol/comment/columnists/magnus_linklater/article4106593.ece; http://www.timesonline.co.uk/tol/comment/columnists/magnus_linklater/

Bargaining Chips: County Antrium & the Lewis Castle

December 2007 - When local government officials rejected the project last week, Trump threatened to walk away -- perhaps to go over to Northern Ireland (County Antrim), where government ministers said they would welcome his big-bucks development.+

– As Trump was meeting in New York this week with the Rev. Ian Paisley, head of the government of Northern Ireland, the Scottish government took control of Trump's application.+

County Antrim

Scottish leader Alex Salmond, whose constituency includes the proposed development, issued a statement saying Trump's plan "raises issues of importance" that require consideration at his level.+

“It looks like Trump is already working on his next book title - How To Get Away With Building Whatever You Like.

Step one: pick a small, impressionable country for your development, one with a slight inferiority complex that's keen to strut its stuff on the world stage.

Step two: play it off against another small, impressionable country with a slight inferiority complex that's keen to strut its stuff on the world stage.

Step three: threaten it with the stick of losing potential revenue and world renown for a glittering top-drawer development.

Step four: dangle lots of carrots, or sweeteners, that cast you in a suitably philanthropic light.

Step five: sit back and let local worthies fight your corner for you.”

• Joanna Blythman on Doanald Trump++

+http://www.washingtonpost.com/wp-dyn/content/article/2007/12/06/AR2007120602387.html++http://www.sundayherald.com/oped/opinion/display.var.2326505.0.pulling_the_tartan_down_over_our_eyes.phpPhoto Source: http://upload.wikimedia.org/wikipedia/commons/thumb/b/bb/Scotland_Lewis_Stornoway_castle.jpg/800px-Scotland_Lewis_Stornoway_castle.jpg

Nicklaus in Scotland June 20 A MASSIVE project that will put the North-east on the world golfing map was given the

green light yesterday by Aberdeenshire Council's infrastructure services committee.– But, sadly for Donald Trump, it wasn't his development.

– Rather, it was a £40 million residential and leisure development that will have as its centrepiece a flagship course designed by Jack Nicklaus. Including the restoration of Ury House, the B-listed derelict Elizabethan-style mansion at the centre of the estate.

While controversy has raged over Mr Trump's insistence that his main championship course should be sited in a protected site of scientific interest, the Nicklaus course development at the Ury estate on the outskirts of Stonehaven has gone quietly through the various stages of the planning process.

The go-ahead was also welcomed by prominent business leaders in the North-east. – Jennifer Craw, the regional operations director for Scottish Enterprise, said "Internationally

renowned backers like Jack Nicklaus, with their household names and reputations, have the kudos to draw visitors from all over the world to our region."

– Richard Milne, the director of FM Developments, said: "Our redevelopment of Ury Estate also represents enabling development in its purest form, with the proceeds from housing directly funding the renovation of historic Ury House.... Our vision for Ury Estate will benefit not only the Stonehaven community, but the region's economy to the tune of tens of millions of pounds."

– Geoff Runcie, the chief executive of Aberdeen and Grampian Chamber of Commerce, said: "Along with the related renovation of Ury House and the addition of new rural housing, this development will bring a new tourism and leisure dimension to the Stonehaven area."

http://news.scotsman.com/scotland/Goahead-for-massive-golf-resort.4205726.jp; Photo Ury House wikipedia.org

Donald Trump Jack Nicklaus

X √

Plane Stupid 03/14/09 A group that calls themselves “Plane

Stupid” protested the expansion of the Aberdeen airport, blaming Trumps Proposed Golf Resort.

http://edition.cnn.com/2009/WORLD/europe/03/03/uk.aberdeen.airport.protest/

Trump scoops Stupid Award for golf course plan

03/26/09 Donald Trump won the much-coveted Ostrich Award for "steamrolling Scottish democracy in order to open the door to developments that encourage flying".– Scottish Stupid Awards 2009 for trashing the planet

http://www.sundayherald.com/news/heraldnews/display.var.2497073.0.trump_scoops_stupid_award_for_golf_course_plan.php

05/26/09 Donald Trump, who, three years ago acquired an 800-acre seaside

site, not far from Royal Aberdeen. Mr. Trump "modestly" promises to build a pair of the best links courses in Scotland, boasting they will be hosting both The British Open and The Ryder Cup someday! Probably not Mr. Trump, Scotland has a few other courses that have been standing in line for a century or so for the honor, Royal Aberdeen among them.

Of course Mr. Trump also wants to build a 450-room luxury hotel with all the usual Florida-like trimmings, including 250 private homes and heaven knows what else, but don't be frightened away. The Donald has recently postponed his plans until world economies improve, so you still have a few years to experience the unspoiled Aberdeen coast, patiently waiting to show-off its historic, golfing treasures.

http://www.pgatour.com/2009/tourlife/travel/05/23/course_of_week/

Enter: Sarah Malone

http://www.eveningexpress.co.uk/Article.aspx/1284313?UserKey=

Sarah Malone 07/07/09 “Sarah Malone to Trump tycoon's

opponents” A formidable woman is poised to drive

forward Donald Trump’s golfing plans for Balmedie in the face of local anger

http://www.timesonline.co.uk/tol/news/uk/scotland/article6445223.ece

The principal anti-Trump lobby, Sustainable Aberdeenshire, has been augmented by a new group, Tripping Up Trump, funded by a “well-known” millionaire backer. Though it’s now an incontestable reality, the development, on the dunes of Menie, looks likely to find stones in its spiked shoes for some time to come.

Sarah Malone Which is where Malone comes in. It was plainly

unsustainable that an American corporation could run its bulldozers over a beauty spot without at least offering some kind of sop to indigenous feeling; the echoes of Local Hero would just be too insistent.

So Malone was headhunted eighteen months ago. Her background was researched by news reports before she was flown to New York for some face-time with Trump himself who was impressed by her record, and - one has to speculate - her looks. Her appointment was finally unveiled last week by Trump’s eldest son, Donald Jnr, who said she would help the global monolith “understand the needs and wants of local people”.

http://www.timesonline.co.uk/tol/news/uk/scotland/article6445223.ece

Foreign Direct Investment (Host)

Benefits to Host Country Supply of capital and

other resources– Technology– Management

Employment BOP (Balance of Payments)

– Capital inflow, import substitution & subsequent exports

Competition– Increase in consumer

choice, lowers prices

Costs to Host Country Loss of national

sovereignty– Foreign parent has no

commitment to host country

Fear of monopoly power BOP

– Import of inputs from abroad

– Outflow of foreign subsidiary's earnings

Foreign Direct Investment (Home)

Benefits to Home Country BOP

– Inflow of foreign earnings Employment effects

– Foreign subsidiaries create demand for home-country exports

Reverse-resource transfer effect

– Foreign subsidiary learns skills abroad and transfers knowledge home

Costs to Home Country BOP

– Initial capital outflow– Export substitution

Export of jobs abroad

Policies and FDI (Home)

Encourage Outward FDI– Government backed

insurance programs– Capital assistance– Tax incentives– Political pressure

Example: Japan responded to political pressure from the U.S. in the ’80s and relaxed informal barriers

Discourage Outward FDI– Limit capital outflows– Tax incentives to invest at

home Example: Britain once

taxed foreign earnings higher than domestic earnings.

– Prohibit national firms from investing in certain countries

U.S. discourages investment in Cuba & Iran

http://www2.toysrus.co.jp/truj/english/index.html

Policies and FDI (Host) Encourage Inward

FDI– Tax concessions– Low interest loans– Grants/subsidies

Discourage Inward FDI– Ownership restraints

Prohibited operating in certain fields

Require that a significant proportion of the equity be owned by local investors

– Performance Restraints

Local Content Hiring Exports

The Negotiation Process

The negotiation process has been characterized as occurring within the context of “the four Cs”

– Common interests – Conflicting interests – Compromise– Criteria

Negotiation & Bargaining Power The outcome of any negotiated agreement depends on

the relative bargaining power of both parties Bargaining power depends on three factors

– The value each side places on what the other has to offer– The number of comparable alternatives available to each side– Each party’s time horizon

Resource for your Final Project http://www.fdi.net/country/

Stuff to this weekend… Optional Review Session on Friday…

– Next week is July 4th

http://www.faneuilhallmarketplace.com/

http://www.marinabaybeachclub.com/

http://www.cityofboston.gov/FreedomTrail/bostoncommon.asp