Intro to FDI Craig R Parsons 2020 Based

Intro to FDI Craig R. Parsons (2020) (Based on K&O&M and Salvatore texts) Parsons, Intro to FDI 1

We can consider two types of International Investment (from K&O&M) • Portfolio Investment in ownership of firms: • Purchasing shares of stock in another country’s firm. • For example, an individual investor (or firm) from Japan buys $10, 000 of stock in Tesla, the electric car company in the US. • And Foreign Direct Investment: • `A firm largely owned by foreign residents acquires a subsidiary firm or factory in the host country. This would be Merger and Acquisitions (M&A) type of FDI. • A firm largely owned by foreign residents BUILDS an entirely new factory in the foreign (host) country. (Greenfield FDI. ) Parsons, Intro to FDI 2

Horizontal FDI and Vertical FDI tends to fall into two main categories : (1 ) Horizontal FDI: The affiliate replicates the production process (that the parent firm undertakes in its domestic facilities) elsewhere in the world; and (2) Vertical FDI: the production chain is broken up, and parts of the production processes are trans ferred to the affiliate location. Investing in affiliates that do the first type of activities is cat egorized as horizontal FDI. Investing in affiliates that do the second type of activities is categorized as vertical FDI which has both horizontal and vertical FDI is called sometimes called `complex` FDI. Parsons, Intro to FDI 3

Examples of Horizontal and Vertical FDI • Horizontal: • E. g. 1 Toyota makes a factory making cars in US or Canada. • E. g. 2 Uniqlo makes a retail clothing store in New York City. • Vertical: (also called “international fragmentation of production”) • E. g. Intel (US) may research and design the computer chip in the US, make the wafer in Malaysia and test it in China. • E. g Rio Tinto (huge mining company based in Australia) bought out `Alcan` a huge aluminum company based in Canada. Parsons, Intro to FDI 4

The 10% rule (quote below from KOM) Parsons, Intro to FDI 5

10% rule continued Parsons, Intro to FDI 6

The 10% rule continued • Many countries, including the US define FDI as when one foreign company has more than 10% ownership of the host country. • Sometimes the ownership is 100%, 50%, 49%, etc. • It is even possible to have FDI both ways! • Example: suppose a Canadian Company owns 15% of some US company. And in turn, that SAME US company owns 20% of that Canadian company. That would be consider inward FDI in both the US and Canada! Parsons, Intro to FDI 7

More on Brownfield vs. Greenfield FDI • Green means `new, fresh` • Brown means `old, dying. ` • Greenfield FDI, typically means the company builds and entirely new factory in the host country. (Example, Korea`s LG built a multi billion dollar electronics production facility in Vietnam a few years ago. ) • Brownfield FDI typically means `Mergers and Acquisition`. (For example, when Ito Yokado bought US Seven Eleven in 1991. ) • Trivia: Seven-Eleven was started in 1927 in Texas. Parsons, Intro to FDI 8