Multinational Financial Management

Alan Shapiro
9th Edition
J.Wiley & Sons

Power Points by
Joseph F. Greco, Ph.D.
California State University, Fullerton

CHAPTER 16
Foreign Direct Investment
and Corporate Strategy

I. THE
THE THEORY
OF THE
THEORY
OF MULTINATIONAL
THE
CORPORATION
MULTINATIONAL
CORPORATION
A. The MNC as an Oligopolist:
1. When is FDI justified?: to judge weather a foreign
investment is desirable is to consider the type of imperfection that the
investment is designated to overcome.

2. Internalization: FDI is most likely to be economically viable.

3. Market Integration
a. Vertical: direct investment across industries that are related to different
stages of production of a particular good.

b.

Horizontal: investment that is cross-border but within an industry.

THE THEORY OF THE

B. Financial Market Imperfections
MULTINATIONAL
CORPORATION
1. Hypothesis

Hypothesis for explaining foreign direct investment relies on the existence

of financial market imperfections

2. Diversification Effect of the MNC

A more important financial motivation for foreign direct investment is likely
to be the desire to reduce risks (exchange rate changes, currency
controls, government intervention..) through international
diversification.

THE STRATEGY OF THE MNC

II. THE STRATEGY OF THE MNC
A. Three strategies:
1. The Innovation-based Multinationals:
MNCs create barriers to entry by continually introducing new products and
differentiating existing ones, both domestically and internationally.
Firms in this category spend large amounts of money on research and
development (R&D). As the industry matures, other factors must replace
technology as a barrier to entry, otherwise, local competitors may
succeed in replacing foreign multinationals in their home markets.

THE STRATEGY OF THE MNC

Strategies (cont)
2. The Mature Multinationals
a. the importance of economies
of scale
(exists whenever a given increase in the scale of production, marketing
or distribution results in a less-than-proportional increase in cost )
and
b. economies of scope (exists whenever the same
investment can support multiple profitable activities less expensively in
combination than separately)

THE STRATEGY OF THE MNC

3. The Senescent Multinationals
a. global scanning capability (seek out lower-cost
production sites. Costs can then be minimized by combining
production shifts with rationalization and integration of the firms
manufacturing facilities worldwide)

b. the role of rationalization

and integration (this strategy usually involves plants
specializing in different stages of production, eg. in assembly of
fabrication as well as in particular components or products)

THE STRATEGY OF THE MNC

B. FDI and Survival
a. Cost reduction: firms in competitive industries have to seize new
cost-reduction opportunities continually, not to earn excess returns but
to make normal profits and survive.
b. Economies of scale: firms in industries characterized by high fixed
costs relative to variable costs must engage in volume selling just to
breakeven (world-scale)
c. Multiple sourcing: Although cost minimization will often dictate
concentrating production in one or two plants, fear of strikes and
political risks usually lead firms to follow a policy of multiple sourcing.
d. Knowledge seeking: firms enter foreign markets in order to gain
information and experience that is expected to prove useful
elsewhere.

DESIGNING A GLOBAL
EXPANSION
STRATEGY
III. HOW TO DESIGN A GLOBAL
EXPANSION STRATEGY

There are 5 Necessary Elements

DESIGNING A GLOBAL EXPANSION

STRATEGY
A. Five Necessary Elements
1. Awareness of profitable investments
-building competitive advantage
2. Selecting a mode of entry
-evaluate systematically
3. Adjusting the Effectiveness of the Entry Mode
-continual auditing

DESIGNING A GLOBAL EXPANSION

STRATEGY

A. Five Necessary Elements (cont)

4. Using appropriate evaluation criteria
5. Estimating the longevity of competitive
advantage:
a. Develop competitive strength
transferable overseas.
b. Not easily duplicated