CH17sguide - 17 ChapterObjectives 1 To evaluate the...

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Chapter Objectives 1. To evaluate the arguments for and against foreign direct investment. 2. To list and describe modes of foreign investment. 3. To discuss foreign direct investment in the Third World. 4. To list the factors that affect cross-border mergers and acquisitions. 5. To describe the major differences in mergers and corporate governance between the United States and Japan. Chapter Outline I. An Overview of Foreign Direct Investment A. The U.S. Department of Commerce defines foreign direct investment as investment in either real capital assets or financial assets with a minimum of 10 percent equity ownership in a foreign firm. i. These investments usually require a large sum of money and are made in expectation of benefits over an extended period. ii. These investments are not readily reversible once they are made. B. Benefits of foreign investment: i. Company benefits: 1. MNCs invest their capital abroad to utilize their oligopoly- created advantages including proprietary technology, Corporate Strategy and Foreign Direct Investment      1 17 Corporate Strategy and  Foreign Direct Investment
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management know-how, multinational distribution networks, access to scarce raw materials, production economies of scale, financial economies of scale, and possession of a strong brand or trade name. 2. The use of these advantages allows the MNC to reduce its cost of capital and to increase its profitability. ii. Host-country benefits: 1. FDI forms one the most important links between developing and industrial countries because it is stable. 2. FDI induces the transfer of technology and skills that are frequently in short supply. 3. FDI increases both national employment and domestic wages. 4. FDI provides local workers with an opportunity to learn managerial skills. 5. FDI contributes to tax revenues and helps balance the international balance of payments. C. Arguments again foreign investment: i. Conflicts between company goals and host-government aspirations: 1. FDI brings about the loss of political and economic sovereignty. 2. FDI controls key industries and export markets. 3. FDI exploits local natural resources and unskilled workers. 4. FDI undermines indigenous cultures and societies by imposing Western values and lifestyles on developing countries. D. Modes of Foreign Investment i. Construction of new plants (internal growth) – the establishment of new operations in foreign countries to produce and sell new products. 1. Can tailor foreign operations to meet exact needs. 2. It takes time for MNCs to reap any rewards from internal growth because they have to build a plant and establish a customer base. ii. Mergers and acquisitions (external growth) – the acquisition or merger of other firms in foreign countries.
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CH17sguide - 17 ChapterObjectives 1 To evaluate the...

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