Welcome to class of

Foreign Direct Investmentsin Emerging Markets

byDr. Satyendra Singh

University of WinnipegCanada

www.uwinnipeg.ca/~ssingh5

What is not FDI• Internationalize business without investments

– Exporting– Licensing permission patents, trademarks– Franchising– Outsourcing

• Contract manufacturing – Nike, Vietnam; Gap, India public image

• Management contract– Hilton logo– Air France, British Airways, KLM booking system EM

• Turnkey projects – One time airport, power plant, oil refinery EM

What is FDI• Internationalize business with investments

– Want ownership– Control of assets of host country– Profit potential $– Compete more effectively

• But– Risks economic and political– Foreign exchange fluctuations– Ban on acquisition on local firms– Restrictions on sending $ (dividends, capital) back home

FDI: 3 Strategies• Greenfield strategy

– Select the site, construct, modern plant, bring own corporate culture, not dealing with previous debt…

– But time, patience, local rules, training workers

• Brownfield (acquisition) strategy– Quick control, brand, workers, distribution– Good as it does not add capacity– But complex need lawyer, banker, M&A, regulators

• Joint Ventures 2 or more firms agree to work together to create a new business entity that is legally separate and distinct from its parents. (Special type of strategic alliance)– Imp tech., communications, government policies outstrip the

ability of international firms to exploit opportunities on their own

Strategic Alliances:Firms Cooperate for Mutual Benefits

• Ease of Market entry– Economies of scale, marketing, distribution, rapid entry,

required by law to have local partner save local brand

• Shared risks – Boeing 777 Fuji+Mitsubishi+Kawaski Japan Airline

• Shared knowledge and expertise– Learn from each other Toyota + GM

• Synergy and competitive advantage– Lipton Tea (mrf. exp) + Pepsi (distribution) US market– Siemens ($) + Motorola (mrf exp) 256-MB DRAM Chip

Strategic Alliances: Scope…

Comprehensivevs

Functional

Strategic Alliances: Scope• Comprehensive all process meshed IJV

– Need good structure, conflict of interest– Kellogs (Europe) General Mills (Cheerios) + Nestle

• Functional narrow in scope no formal IJV– Production

• Chrysler (excess capacity, economies of scale) + BMW (design) 1.4 L small engine EM, Mercosur

– Marketing• Mattel (Barbie, US) ↔ Bandai (Power rangers, Japan) • Without Mattel, Bandai could not enter South America

– Financial• 20th Century Fox + Paramount Pictures Titanic

– R&D• Kodak + Fuji Advanced Photo system Canon, Minolta, Nikon

Strategic Alliances: Implementation…

--Shared--Assigned--Delegated

Strategic Alliances: Implementation

• Selection of partners compatibility trust– Mgmt style: Finance (GM, UK) vs. Engr (Siemens, Germany)

– Leaning potential of alliance: inventory, training, MIS…

• Form of ownership– Country: tax and legal advantages IJV Bahamas– Public-private: drilling rights, lumber Govt stability

• Management considerations– Shared: firms participate actively, ask parent, conflict– Assigned: dominant firm has the power to make decision– Delegated: IJV has the power, implement strategy

Strategic Alliances: Pitfalls…

Strategic Alliances: Pitfalls• Incompatibility of partners

– Who has the power, negotiate ahead—goals, beliefs

• Access to information– Ford + Mazda (no visit to R&D) Ford Escort– Unisys (no access to design) + Hitachi Computers

• Distribution of earnings– No reinvestment, accounting methods

• Loss of autonomy– Opportunistic behavior, deliberate delay in supply

• Changing circumstances– Ford + Volkswagen Autolatina (Brazil), inflation, debt

crisis sometimes outdated technology