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The Spectrum of Political Ideology Toward FDI
RadicalView
PragmaticNationalism
FreeMarket
© McGraw Hill Companies, Inc., 2000 7-1
Figure 7.1
Radical View Marxist view is that MNE’s enslave less
developed countries. Instrument of domination not
development.
Popular from WWII to the 1980s. Practiced by Eastern Europe, India, China, 3d
World Countries.
Ended with the collapse of Communism. Bad performance by those countries vs those
with freer market approach© McGraw Hill Companies, Inc., 2000 7-2
Free Market View
Sees FDI as way to disperse production and flow of goods and services in the most efficient manner. Supported by Smith and Ricardo and ‘market
imperfection’ explanations of FDI.
However, all countries impose some restrictions on FDI.
© McGraw Hill Companies, Inc., 2000 7-3
Pragmatic View
Lies somewhere between radical and free market views.
Gov’ts should maximize national benefits and minimize costs of FDI.
© McGraw Hill Companies, Inc., 2000 7-4
© McGraw Hill Companies, Inc., 2000
Ideology Characteristics Host-Government PolicyImplications
Radical Marxist rootsViews the MNE as an
instrument of imperialistdomination
Prohibit FDINationalize subsidiaries of
foreign-owned MNEs
FreeMarket
Classical economic roots (Smith)Views the MNE as an
instrument for allocatingproduction to most efficientlocations
No restrictions on FDI
PragmaticNationalism
Views FDI as having bothbenefits and costs
Restrict FDI where costsoutweigh benefits
Bargain for greater benefitsand fewer costs
Aggressively court beneficialFDI by offering incentives
Ideology and FDI
7-5© McGraw Hill Companies, Inc., 2000
Table 7.1
© McGraw Hill Companies, Inc., 2000
Benefits of FDI to Host Countries
Resource-transfer effects. Employment effect. Balance-of-payments effect. Economic growth.
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© McGraw Hill Companies, Inc., 2000
Employment Effects
Brings jobs that otherwise would not be created. Direct: Hiring host-country citizens. Indirect:
• Jobs created by local suppliers.
• Jobs created by increased spending by employees of the multi-national enterprise.
Questions remain on whether net jobs gained.
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© McGraw Hill Companies, Inc., 2000
Balance-of-Payments Effects
Host country benefits from initial capital inflow when MNE establishes business. Host country records current account debit on
repatriated earnings of MNE.
Host country benefits if FDI substitutes for imports of goods and services.
Host country benefits when MNE uses its foreign subsidiary to export to other countries.
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© McGraw Hill Companies, Inc., 2000
Current Account Credits DebitsExport of goods, services andincome
$969,189
Merchandise 575,940Services 210,590Income receipts on investments 182,659Imports of goods, services andincome
$-1,082,268
Merchandise -749,364Services -142,230Income payments on investments -190,674Unilateral transfers -35,075Balance of current account -113,079
Capital AccountUS assets abroad (net) -307,856US official reserve assets -9,742Other government assets -280US private assets -297,834Foreign assets in the US 424,462Foreign official assets 109,757Other foreign assets 314,705Balance on capital account 116,606Statistical discrepancy 31,548
US Balance-of-Payments Accounts 1995
$Millions
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Table 7.2
© McGraw Hill Companies, Inc., 2000
Economic Growth
Increased: productivity growth, product and process innovation, and greater economic growth,
Stemming from increased competition of MNE’s investments.
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Host Country Problems With FDI
Drives out local competitors. Can prevent the development of ‘local’
competitors. Profits brought home ‘hurts’ (debit) a host’s
capital account. Parts imported for assembly hurt trade
balance. Can affect sovereignty and national
defense.© McGraw Hill Companies, Inc., 2000 7-12
Home Country FDI Benefits Improves balance of payments for inward flow of
foreign earnings. Creates a demand for exports.
Export demand can create jobs.
Increased knowledge from operating in a foreign environment.
Benefits the consumer through lower prices. Frees up employees and resources for higher value
activities.
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© McGraw Hill Companies, Inc., 2000
Home Country Problems with FDI
Negative effect on Balance of Payments Initial capital outflow. MNE uses foreign subsidiary to
sell back to home market. MNE uses foreign subsidiary as
a substitute for direct exports.
Potential loss of jobs.
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How Do Countries Encourage FDI?
Risk insurance.(Home) Elimination of double taxation. (Home) Tax incentives.(Host) Low interest rates. (Host) Stable government and stable policies.
7-15© McGraw Hill Companies, Inc., 2000
© McGraw Hill Companies, Inc., 2000
How Do Countries Discourage FDI?
Limit capital outflows. (Home) Manipulate tax code to encourage domestic
investment. (Home) Political restrictions on investing in certain
countries. (Home) Ownership restraints. (Host) Performance requirements. (Host)
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Cross-Border Mergers
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$ Billions
© McGraw Hill Companies, Inc., 2000 7-17
© McGraw Hill Companies, Inc., 2000
The Nature of Negotiation
Objective: reach an agreement that benefits both parties.
In the international context, must: understand the influence of
norms and value systems. Be sensitive to how these factors
influence a company’s approach to negotiations.
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© McGraw Hill Companies, Inc., 2000
The Context of NegotiationThe four Cs
Common
Interests
Compromise
Negotiation
Process
Conflicting Interests
Criteria
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