C8.1. FDI key concepts — Transcript

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1. 0:00hello welcome to chapter eight foreign
2. 0:02direct
3. 0:03investments uh in this chapter we'll
4. 0:05talk about
5. 0:07um investing in foreign countries
6. 0:12okay let's get started
7. 0:17so what is foreign direct investment
8. 0:21and this is pretty much what it sounds
9. 0:23like it's when a company
10. 0:25invests directly into a market or a
11. 0:29foreign country
12. 0:30either expanding or developing
13. 0:33retail or storage locate locations
14. 0:36outside of their home country
15. 0:38and foreign direct investment is one way
16. 0:40to become a multinational enterprise and
17. 0:44you can do what's called a greenfield
18. 0:45investment
19. 0:46which is the establishment of a wholly
20. 0:48owned new operation in a foreign country
21. 0:51or make an acquisition or merger with an
22. 0:53existing company
23. 0:54to get access to the foreign market
24. 0:59and we saw uh in one of the earlier
25. 1:01chapters we talked about walmart
26. 1:02and how walmart purchased a uh
27. 1:06supermarket chain in germany to get
28. 1:08started in germany
29. 1:10a venture a foreign direct investment
30. 1:12later failed
31. 1:13but it's usually the quickest way
32. 1:17to get a foothold into a farm market is
33. 1:19to establish
34. 1:20a merger acquisition with another
35. 1:22company that's already in that market
36. 1:27okay so there are two ways to look at
37. 1:30fdi
38. 1:33the amount of fdi undertaken over a
39. 1:36given time period we have the outflows
40. 1:38of foreign direct investment
41. 1:40out of the country and the inflows into
42. 1:42the country so united states has
43. 1:44a large amount of money that is directed
44. 1:48into um foreign businesses
45. 1:52every year but we also have a huge
46. 1:53amount of money that's invested in our
47. 1:55domestic business from foreign sources
48. 1:59okay
49. 2:03so let's talk about some trends in fdi
50. 2:07the past 35 years have been
51. 2:12a huge increase in the flow of
52. 2:15fdi in the world economy the average
53. 2:18yearly outflow of fdi increased from
54. 2:2025 billion in 1975 to 1.5 trillion today
55. 2:25and the fdi outflows did contract around
56. 2:291.1 trillion during the great recession
57. 2:32but that's
58. 2:34to be expected as companies pulled back
59. 2:36in response to the recession
60. 2:38um as markets have become freer
61. 2:42fdi has grown alongside with
62. 2:45free trade um
63. 2:50and that is you know despite the general
64. 2:51decline in trade barriers over the past
65. 2:5330 years
66. 2:54firms still still feel uh fear
67. 2:57protectionist pressure
68. 2:59so executives see foreign direct
69. 3:01investment as a way to circumvent trade
70. 3:02barriers
71. 3:04to establish or increase uh fdi has been
72. 3:07driven by political and economic changes
73. 3:11that have been occurring in many of the
74. 3:12world's developing nation
75. 3:14uh nations a general shift towards
76. 3:17domestic
77. 3:18political institutions and free market
78. 3:20economies that we discussed
79. 3:22um in earlier chapters has encouraged
80. 3:25more
81. 3:25fdi so you know if you're
82. 3:29if you're you know for example a lot of
83. 3:31foreign automakers
84. 3:32um are see a lot of
85. 3:36laws and a lot of potential for tariffs
86. 3:38and quarters on
87. 3:40imports of foreign vehicles into the
88. 3:42united states
89. 3:44and the requirements of a certain
90. 3:46percentage of the car being
91. 3:48um domestic has encouraged many of these
92. 3:52um auto manufacturers develop
93. 3:55production plants inside the united
94. 3:57states also mary a very uh many a lot of
95. 4:00american companies developed
96. 4:02uh subsidiaries in the eurozone so they
97. 4:05had
98. 4:06access to the eurozone without uh many
99. 4:08of these trade restrictions as well in
100. 4:10fact
101. 4:10ireland was a favorite destination in
102. 4:13many countries to set up shop in ireland
103. 4:15and uh take advantage of a business
104. 4:18friendly country
105. 4:19and get direct access to the eurozone
106. 4:21without having to worry about
107. 4:22all the tariffs that will be inflicted
108. 4:25upon your
109. 4:26tariffs and trade uh administrative
110. 4:29paperwork and all that sort of things if
111. 4:30you're trying to
112. 4:32um export from the united states
113. 4:34directly into the eurozone so this way
114. 4:35you can establish
115. 4:36a uh subsidiary and say ireland and then
116. 4:39you have access to ship to any of the
117. 4:41eurozone countries
118. 4:49and of course with globalization you
119. 4:52know
120. 4:52companies want to have a presence all
121. 4:55around the world
122. 4:56and you know with the pressure of stock
123. 4:59markets for companies having to increase
124. 5:01sales and increase
125. 5:01profits they need to expand globally to
126. 5:04maintain that momentum
127. 5:05moving forward here are some trends and
128. 5:08you can see
129. 5:08the overall trend is increasing except
130. 5:10in times of recession
131. 5:12in the early 2000s and the mid-2000s
132. 5:18in the past most of foreign direct
133. 5:20investment was targeted
134. 5:21at in between developing nations um
135. 5:25specifically the united states european
136. 5:27union but more recently
137. 5:29the whole world has been able to share
138. 5:31in the foreign direct investment as
139. 5:33much of a foreign direct investment has
140. 5:36been shifted towards the development
141. 5:37world
142. 5:39and we can see a lot of developing
143. 5:40countries benefiting from this foreign
144. 5:42direct investment specifically china
145. 5:44as other companies rush in to get
146. 5:46involved in growth markets of
147. 5:48say china india latin america brazil
148. 5:50things of that nature
149. 5:56okay since world war
150. 6:00ii the u.s has been the largest source
151. 6:02of foreign direct investments
152. 6:04in total and that makes sense since it's
153. 6:06the world's it's been the world's
154. 6:07largest economy for
155. 6:0940 years or so but other countries that
156. 6:11have a high amount of
157. 6:13investment and foreign direct investment
158. 6:15to other countries of course are
159. 6:17certain european countries like you know
160. 6:19you have england france germany
161. 6:21japan being the big four and recently
162. 6:24chinese companies have emerged as a
163. 6:26major foreign investor as chinese
164. 6:28companies have been making a lot of
165. 6:29money over the past 20 years
166. 6:32have been turning around and using
167. 6:34foreign direct investments
168. 6:35one specific area would be commodities
169. 6:37and they've invested heavily in
170. 6:38countries like brazil
171. 6:40venezuela and australia
172. 6:46and here is just the levels of foreign
173. 6:48direct investments you can see by far
174. 6:49the united states is the biggest still
175. 6:54okay so let's talk about forms of
176. 6:57um foreign direct investment um
177. 7:02now the foreign direct investment um
178. 7:06can take a few different forms like i
179. 7:08was saying before there's the green
180. 7:09field investment
181. 7:10where you build a new facility or or an
182. 7:13acquisition of
183. 7:14a merger with an existing local firm
184. 7:18the u.n estimates that somewhere between
185. 7:2040 to 80 of all foreign direct
186. 7:22investment inflows were this type of
187. 7:24form of merger acquisition
188. 7:29and acquisitions account for about 78 of
189. 7:31all foreign direct investment
190. 7:33and the reason is because once you make
191. 7:34an acquisition everything's ready set up
192. 7:36for you the employees the facilities
193. 7:38the stores the paperwork the government
194. 7:41ties
195. 7:42it's just a much easier thing to do
196. 7:43rather than starting from scratch in a
197. 7:45foreign country where you're not
198. 7:46familiar with the tastes the culture the
199. 7:49bureaucracy
200. 7:50so that's why those acquisitions are so
201. 7:52popular
202. 7:56um know however foreign direct
203. 7:59uh foreign direct investment flows into
204. 8:02developing nations differ
205. 8:04from those of developed nations in the
206. 8:06case of developing nations
207. 8:08um about two-thirds
208. 8:17come from cross-border mergers and
209. 8:19acquisitions a lower percentage of
210. 8:21mergers and acquisitions
211. 8:22acquisitions they simply reflect the
212. 8:24fact that there are fewer
213. 8:26target companies to acquire in
214. 8:27developing countries this makes sense so
215. 8:29there may not be a a local company
216. 8:33that a supermarket chain that you could
217. 8:36buy out so you have to go in there and
218. 8:38create it from scratch
219. 8:40so um i mean firms do prefer
220. 8:44to acquire existing assets rather than
221. 8:45undertake uh greenfield investment
222. 8:48however it's sometimes you have no
223. 8:50choice
224. 8:52the uh acquisitions are quicker to
225. 8:54execute
226. 8:56uh however you know sometimes if there's
227. 8:59no market there
228. 9:00you're really the first mover you may
229. 9:02have to build up your own
230. 9:04uh distribution and retail locations
231. 9:09and manufacturing plants yourself