Wendy Jeffus

1
International Business

• Wendy Jeffus
• Harvard Summer School

2
Introduction

• Administration
• Project Proposals Due
• Fridays Section Midterm Review
• Chapter 6 Slides
• Foreign Direct Investment Dubai
• Case Study Starbucks Foreign Direct Investment
  
• Chapter 7 Foreign Direct Investment
• We Cant All Play the Violin

3
(No Transcript)
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Dubai Past Present
1991
2005
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Dubai Burj al-Arab
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Dubai Palm and the World
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Dubai Burj Dubai
8
Dubai Dubailand Ski Dome
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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
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Case Assignments

• Starbucks FDI
• Present a 5-10min (timed) assessment of the case.
• All group members must participate.

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Chapter 7 Foreign Direct Investment

• Wendy Jeffus
• Harvard Summer School

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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

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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 in the US due
in part to quotas on imports. In addition,
believed lean production was hard to replicate.
Dell (U.S.) call centers in India
IBM Microsoft (U.S.) have software development
in India
PG (U.S.) moved some of its back-office
accounting to the Philippines
14
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
• For your final project see http//www.fdi.net/cou
  ntry/

http//www.zawya.com/story.cfm/sidZAWYA20090423111
545
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Which Country?
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Where to Invest?

• Theory versus Practice
• The decision to invest abroad is often a stage in
  the firms 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

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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)

http//www.investmentsandincome.com/investments/ol
i-paradigm.html
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Eclectic Paradigm (O-L-I)
Examples of types of location-specific factors
are markets, resources, production costs,
political conditions, cultural/linguistic
affinities, concentration of knowledge
development .
Location Frances wine industry
Location Chinas Z-Park
Examples benefits from controlling the foreign
business activity, rather than hiring an
independent local company to provide the service
Examples of types of ownership factors
technology, knowledge, patent, know-how, size.
Microsofts Intellectual Property
Japans auto industry
http//bizeco.blogspot.com/2005_06_01_archive.html
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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.

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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.

John Thain, MLs CEO
Ken Lewis, BoA CEO
Photo source For Bank of America and Merrill,
Love Was Blind
1 http//www.bizjournals.com/baltimore/stories/2
007/11/05/daily15.html 2 http//www.nytimes.com/
2009/02/08/business/08split.html
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Whos the Boss

• BP/Amoco Merged in 1998
• A popular joke in Amoco hallways goes Whats 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!

Photo Source http//www.albhydrocarbon.com/logot/
bpamoco4.gif http//www.intermarkinc.com/Sponsors
20Home20Page/BP_new.gif
22
Foreign Direct Investment

• Horizontal FDI - investment in the same industry
• Cemex (Mexicos 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

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Licensing

• Licensing is basically selling know-how (i.e.
  technology, brand, etc.)
• U2 Has Licensed its song Get on Your Boots for
  the World Cup Games.
• http//entertainment.gather.com/viewArticle.action
  ?articleId281474978297047
• June 10, 2010 For the first time FIFA has
  licensed imagery, including mascots and logos, to
  be transformed into a clothing brand, through
  Singapore-based Global Brands Group.
• http//www.ft.com/cms/s/0/a3849610-7427-11df-87f5-
  00144feabdc0.html

http//www.paulspins.com/0010fifa/graphics/_logo.j
pg
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Licensing vs. FDI

• Choose FDI when
• Need to protect know-how
• RCA licensed its color TV technology to
  Matsushita and Sony (oops).
• Want tight control
• Kodak wants its Japanese subsidiary to keep Fuji
  busy.
• Think others cant replicate your competitive
  advantage.
• Toyota thinks foreign companies dont get it.

Photo source Company websites
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Franchising

• Franchising is the service industrys version of
  licensing.
• McDonalds chooses franchising because
• Fast-food cant 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.

http//filtafryfranchise.info/wp-content/uploads/2
010/02/franchise.jpg
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Decision Making Grid For FDI
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Political Ideology
First, No Country has adopted the Radical or
Free Market views in their pure forms
Radical View
Pragmatic Nationalism
Free Market
FDI benefits both countries Come on In
MNEs are instruments of imperialist domination
Cuba Cambodia
US, UK,
Sweden, Mexico, S. Korea
Note While the U.S. is seen as one of the most
open markets, the country still prohibits
certain FDI (e.g. investment from Iran Cuba)
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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
• Even free market economies block FDI
• protect infant industry
• anti-dumping
• national security

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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

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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

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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
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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

33
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 Aberdeenshires
  economic base, leading to rapid population growth.

https//www.cia.gov/library/publications/the-world
-factbook/geos/uk.html
Latest figures (2006) Source http//www.aberdeens
hire.gov.uk/statistics/area/aberdeenshire_profile2
007.pdf
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Aberdeenshire, Scotland

• Menie Estate, close to the North Sea near
  Balmedie.

X
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
35
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
36
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-c
hange-of.4200208.jp http//www.portfolio.com/vi
ews/blogs/daily-brief/2008/06/10/the-donald-gets-a
-scottish-cheer Photo source http//www.nydailyne
ws.com/news/us_world/2008/06/10/2008-06-10_donald_
trump_vows_love_for_scotland_as_h-1.html
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FDI in Scotland

• Benefits 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
  systemsthe 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-c
hange-of.4200208.jp http//www.cogolf.ca/news.
php?readmore242 Sand dunes in the area are
designated to be of Special Scientific Interest
(SSSI)
38
Opposition

• Michael Forbes owns 23 acres on the Scottish cast
  that Donald Trump wants and hes 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.

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.
http//www.washingtonpost.com/wp-dyn/content/artic
le/2007/12/06/AR2007120602387.html http//www.p
ortfolio.com/views/blogs/daily-brief/2008/06/10/th
e-donald-gets-a-scottish-cheer
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Support

• Magnus Linklater is backing Donald Trump.
• Hes 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).

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
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
http//www.timesonline.co.uk/tol/comment/columnist
s/magnus_linklater/article4106593.ece
http//www.timesonline.co.uk/tol/comment/columnist
s/magnus_linklater/
40
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/arti
cle/2007/12/06/AR2007120602387.html http//www.s
undayherald.com/oped/opinion/display.var.2326505.0
.pulling_the_tartan_down_over_our_eyes.php Photo
Source http//upload.wikimedia.org/wikipedia/comm
ons/thumb/b/bb/Scotland_Lewis_Stornoway_castle.jpg
/800px-Scotland_Lewis_Stornoway_castle.jpg
41
Nicklaus in Scotland
X
v

• 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-mass
ive-golf-resort.4205726.jp Photo Ury House
wikipedia.org
42
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/
43
Enter Sarah Malone
http//www.eveningexpress.co.uk/Article.aspx/12843
13?UserKey
44
Sarah Malone

• 07/07/09 Sarah Malone to Trump tycoon's
  opponents
• A formidable woman is poised to drive forward
  Donald Trumps 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 its 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.
45
Case Questions

• Should Malone accept this position?
• What issues should she consider when making her
  decision?
• What are the relevant benefits and costs of this
  investment for Scotland and for the local
  community? Do the benefits outweigh the costs?
• Is there a win-win solution?

Please note, I have decided to include this as a
bonus question on your mid-term exam. (you can
earn up to 20 points) The maximum score on the
mid-term is 100 points (100).
46
The Negotiation Process

• The negotiation process has been characterized as
  occurring within the context of the four Cs
• Common interests
• Conflicting interests
• Compromise
• Criteria

47
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 partys time horizon

48
Stuff to do this weekend

• Optional Review Session on Friday
• Next week is July 4th

http//www.faneuilhallmarketplace.com/
http//www.cityofboston.gov/ FreedomTrail/bostonco
mmon.asp