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Last Modified 3/23/2006 3:49:38 PM Pacific Standard Time Printed 3/22/2006 11:04:52 AM Pacific Standard Time

McKinsey Global Institute

CONFIDENTIAL CONFIDENTIAL

FDI and Technology Absorption


Jaana Remes Document McKinsey Global Institute
Date
This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client This report is solely for the use of client personnel. No part of it may be organisation without prior written approval from McKinsey & Company. circulated, quoted, or reproduced for distribution outside the client This material was used by McKinsey & Company during an oral organization without prior written approval from McKinsey & Company. presentation; it is not a complete record of the discussion. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.

MULTINATIONAL COMPANY INVESTMENT HAS INCREASED Unit of measure RAPIDLY IN THE PAST DECADE
Inflows $ Billions 300 250 200 150 100 50 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 Main drivers Liberalization and privatization Decline in transport and communication cost

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2000

2002

* Based on estimates from OECD 2000 segmentation of total FDI (developed and developing countries); * Footnote excludes resource seeking FDI (e.g., for petroleum) Source: OECD; Source McKinsey Global Institute; WDI

A BROAD FACT BASE PROVIDES RANGE OF INSIGHTS


Unit of measure

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China Auto Consumer electronics Food retail Retail banking IT/BPO*

India

Mexico

Brazil

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* Footnote * Information technology/business process offshoring (IT/BPO); completed individual case studies for IT and BPO, Source: thus Source the total studies completed to 14 bringing

MOST ECONOMIES CLEARLY BENEFIT FROM FOREIGN INVESTMENT


Unit of measure

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Very positive

Overall FDI Impact

Positive

**

Positive or very positive impact in 13 out of 14 cases across sectors

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Neutral

Negative

Pure market-seeking

Tariff-jumping Motive for entry

Efficiency-seeking

* BPO * ** Footnote IT Source: Source: Source

McKinsey Global Institute

WE FOUND SOUND ECONOMIC FOUNDATION TO BE KEY, WHILE Unit of measure INVESTMENT POLICIES WERE INEFFECTIVE AND EVEN HARMFUL

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Economic foundations Macroeconomic stability Competition Enforcement Infrastructure

Impact from FDI Investment policies Incentives Import barriers TRIMs*

* Footnote Source: * TRIMs Source = trade-related investment measures

FOUNDATIONS FOR ECONOMIC DEVELOPMENT ARE CRITICAL


Unit of measure

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Increased FDI impact


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Macroeconomic stability Competitive environment Legal enforcement

Precondition for MNC investment


and FDI impact

Competition most powerful factor


driving FDI impact

Informality reduced FDI impact


and sector performance

Infrastructure

Important enabling condition for


FDI impact

* Source:

Footnote Source

IN INDIAN AUTO SECTOR, LARGEST FDI IMPACT CAME THROUGH Unit of measure INCREASED COMPETITION
Labor productivity Equivalent cars per equivalent employee; indexed to 1992-93 (100)
Less productive than Maruti mainly due to lower scale and utilization

Auto India

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Increased automation, innovations in OFT and supplierrelated initiatives

156

84

356

144 100 38

Productivity Improvein 1992-93 ments at HM

Improvements at Maruti

Exit of PAL

Entry of new players

Productivity in 1999-2000

Indirect impact of FDI driven by competition


* Source: Footnote and employment (not adjusted) Actual cars Source MGI; McKinsey Global Institute; team analysis

Direct impact of FDI


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IN MEXICAN FOOD RETAIL, WALMART ENTRY LED OTHERS Unit of measure TO IMPROVE SUPPLY CHAIN EFFICIENCY
Share of total sales distributed Number of distribution through centers (2001 vs. 2005) Percent centers in 2001 Wal-Mart* 12
85

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ROUGH ESTIMATES

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Comercial Mexicana Gigante

20

40

60

30

28

58

Between 1996-2001, WalMart labor productivity grew by 2% annually, while it declined by 2% annually in the rest of the modern sector

Soriana

75

5 80

* Source:

Footnote total sales distributed through centers not updated Share of Source Annual reports

Regional player in more developed Northern Mexico


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IN BRAZILIAN FOOD RETAIL, PRODUCTIVITY INCREASES BUT PROFITS Unit of measure EVAPORATE WHEN AN INFORMAL RETAILER IS ACQUIRED BY A LARGE FORMAL RETAILER
Despite a 32% increase in labor productivity* . . . Reals
Percent change

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. . . the net margin evaporates Percent


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12.2
32%

4.9

9.3
-97%

0.1
Acquisition Number of employees Hours worked/year/ employee Pre 1,460 2,328 Post 1,095 2,328 -25% 0% Gross sales R$ millions Net sales R$ millions Gross margin Pre 180 163 19 Post 144 125 25 -20% -24% 29%
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* Gross margin per employee hour Percent Note: 1) See next page for more detail on causes for observed changes. 2) Margins based on net * Footnote sales Source: Source: Source ABRAS; PNAD; store visits; interviews; McKinsey

INVESTMENT POLICIES HAVE NEGATIVE Unit of measure AND UNINTENDED CONSEQUENCES

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Incentives

Fiscal and administrative cost Reduced productivity Race-to-the-bottom dynamics Limited competition Protection of low productivity players Protection of low productivity players Limited flexibility to compete

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Import barriers

TRIMS

Reduced FDI impact


* Source: Footnote Source

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INCENTIVES CONTRIBUTED TO CAPACITY BUILD-UP IN BRAZILS Unit of SECTOR AUTOmeasure

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3,000
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340 380 1,800 480


Collectively, the industry built more than double what would have been expected under long-term trends

1995 capacity

Investments based on long-term growth trends

Additional investments, due to great expectations for future growth

Further investments, due to incentives, Sweetners, and the race to grow

2001 capacity

* Footnote Source: Source: Source

McKinsey Global Institute

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HIGH TARIFFS LIMIT COMPETITION AND INCREASE PRICES Unit of measure IN INDIAS CONSUMER ELECTRONICS SECTOR
Average tariff/effective rate of protection on final goods TV example Color TV price breakdown Percent Index, international best practice = 100 130
Includes raw material, conversion costs and margin

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Mobile* phones

14
100

PC s Refrigerators

39
30

The protection offered by import duties on domestic players finds to mask inefficiency

9-12

39
Retail price International best practice price Import duty on finished good Import duty on raw material

8-10 Higher margin

8-13 Inefficiency in the process

TVs
* Footnote Source: Source: Source

30

McKinsey CII report

12

WE FOUND SOUND ECONOMIC FOUNDATION TO BE KEY, WHILE Unit of measure INVESTMENT POLICIES WERE INEFFECTIVE AND EVEN HARMFUL

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Economic foundations Macroeconomic stability Competition Enforcement Infrastructure

Impact from FDI Investment policies Incentives Import barriers TRIMs*

* Footnote Source: * TRIMs Source = trade-related investment measures

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Unit of measure

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www.mckinsey.com/mgi

* Source:

Footnote Source

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