Global business 4th edition mike peng solutions manual 1

Solution Manual for Global Business 4th Edition

by Mike Peng

ISBN 130550089X

9781305500891

FULL DOWNLOAD LINK AT:

SOLUTION MANUAL: HTTPS://TESTBANKPACK.COM/P/SOLUTIONMANUAL-FOR-GLOBAL-BUSINESS-4TH-EDITION-BY-MIKE-PENG-ISBN130550089X-9781305500891/

TEST BANK: HTTPS://TESTBANKPACK.COM/P/TEST-BANK-FORGLOBAL-BUSINESS-4TH-EDITION-BY-MIKE-PENG-ISBN-130550089X9781305500891/

CHAPTER 6

INVESTING ABROAD DIRECTLY

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

1. use the resource-based and institution-based views to answer why foreign direct investment (FDI) takes place.

2. understand how FDI results in ownership, location, and internalization (OLI) advantages.

3. identify different political views on FDI based on an understanding of its benefits and costs to host and home countries.

4. participate in two leading debates concerning FDI.

5. draw implications for action.

GENERAL TEACHING SUGGESTIONS

There are alternative approaches to stimulating interest in this subject.

 One approach is to stimulate negative discussion. Discuss a common misunderstanding pertaining to offshoring. Point out that not all offshoring involves shipping jobs overseas. Some is due to the need to be close to resources or to growing markets. In recent years, the downturn in the U.S. economy was such that firms would have no reason to expand in the U.S. because they were not able to sell all that they are currently capable of producing. On the other hand, there were growing markets in Asia. The need for a cost advantage to sell in those markets indicated that is where the expansion should occur.

 A positive approach would be to point out that some firms may have at least some people from its home base to assist in managing overseas operations and that might result in future career opportunities.

OPENING

CASE

DISCUSSION GUIDE

Opening Case: Emerging Markets: Indian FDI in Britain

Almost half of India’s outward FDI goes to Britain, which has benefited from the investments. For example, FDI from India has created more than 100,000 jobs in Britain. India has encouraged FDI by reducing the tax rate for dividends from overseas investments. Cultural ties also bind India and Britain, creating a strong bond between the countries. Investors must be aware of risks though, including the fluctuation of foreign currency exchange rates. Future FDI might be affected by politics in India and the growth of trade between India and China.

CHAPTER OUTLINE: KEY CONCEPTS AND TERMS

Sections I through IX of Chapter 6

I. UNDERSTANDING THE FDI VOCABULARY

1. Key Concepts

FDI refers to directly investing in activities that control and manage value creation in other countries. MNEs are firms that engage in FDI. FDI can be classified as horizontal FDI and vertical FDI.

Flow is the amount of FDI moving in a given period in a certain direction (inflow or outflow). Stock is the total accumulation of inbound FDI in a country or outbound FDI from a country.

2. Key Terms

 Downstream vertical FDI is a type of vertical FDI in which a firm engages in a downstream stage of the value chain in a host country.

 FDI flow is the amount of FDI moving in a given period (usually a year) in a certain direction.

 FDI inflow is inbound FDI moving into a country in a year.

 FDI outflow is outbound FDI moving out of a country in a year.

 FDI stock is the total accumulation of inbound FDI in a country or outbound FDI from a country across a given period (usually several years).

 Foreign portfolio investment (FPI) refers to an investment in a portfolio of foreign securities such as stocks and bonds.

 Horizontal FDI is a type of FDI in which a firm duplicates its home country-based activities at the same value chain stage in a host country.

 Management control right is the right to appoint key managers and establish control mechanisms.

 Upstream vertical FDI is a type of vertical FDI in which a firm engages in an upstream stage of the value chain in a host country.

 Vertical FDI is a type of FDI in which a firm moves upstream or downstream at different value chain stages in a host country.

II. WHY DO FIRMS BECOME MNEs BY ENGAGING IN FDI?

1. Key Concept

FDI results in economic gain. Firms seek ownership (O) advantages, location (L) advantages, and internalization (I) advantages collectively known as the OLI advantages. The resource-based view suggests that the key word of FDI is D (direct), which reflects firms’ interest in directly managing, developing, and leveraging their firm-specific resources and capabilities abroad. The institution-based view argues that recent expansion of FDI is indicative of generally friendlier policies, norms, and values associated with FDI (despite some setbacks).

2. Key Terms

 Internalization refers to the replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries.

 Licensing is Firm A’s agreement to give Firm B the rights to use A’s proprietary technology (such as a patent) or trademark (such as a corporate logo) for a royalty fee paid to A by B. This is typically done in manufacturing industries.

 Location refers to advantages enjoyed by firms operating in a certain location

 Market imperfection (market failure) is the imperfect rules governing international transactions.

 OLI advantage is a firm’s quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages via FDI.

 Ownership is an MNE’s possession and leveraging of certain valuable, rare, hard-toimitate, and organizationally embedded (VRIO) assets overseas in the context of FDI

III. OWNERSHIP ADVANTAGES

1. Key Concept Ownership refers to MNEs’ possession and leveraging of certain valuable, rare, hard-toimitate, and organizationally embedded (VRIO) assets overseas.

2. Key Terms

 Dissemination risk is the risk associated with unauthorized diffusion of firmspecific know-how.

IV. LOCATION ADVANTAGES

1. Key Concepts Location refers to certain locations’ advantages that can help MNEs attain strategic goals.

2. Key Terms

 Agglomeration is the clustering of economic activities in certain locations.

 Knowledge spillover is knowledge diffused from one firm to others among closely located firms.

 Oligopoly is an industry dominated by a small number of players

V. INTERNALIZATION ADVANTAGES

1. Key Concept Internalization refers to the replacement of cross-border market relationship with one firm (the MNE) locating in two or more countries. Internalization helps combat market imperfections and failures.

2. Key Term

 Intrafirm trade involves international transactions between two subsidiaries in two countries controlled by the same MNE.

VI. REALITIES OF FDI

1. Key Concepts

The radical view is hostile to FDI, and the free market view calls for minimum intervention in FDI.

Most countries practice pragmatic nationalism, weighing the benefits and costs of FDI. FDI brings a different (and often opposing) set of benefits and costs to host and home countries.

2. Key Terms

 Contagion effect (also called imitation effect or demonstration effect) is the reaction of local firms to rise to the challenge demonstrated by MNEs through learning and imitation.

 Demonstration effect (also called the contagion effect or imitation effect) is the reaction of local firms to rise to the challenge demonstrated by MNEs through learning and imitation

 Free market view is a political view that suggests that FDI unrestricted by government intervention is best

 Pragmatic nationalism is a political view that only approves FDI when its benefits outweigh its costs.

 Radical view is a political view that is hostile to FDI.

 Technology spillover is technology diffused from foreign firms to domestic firms

VII.HOW MNES AND HOST GOVERNMENTS BARGAIN

1. Key Concept

Forces affecting bargaining include common interests, conflicting interests, and compromises as affected by each party’s strengths and perception of gain from the bargain.

2. Key Terms

 Bargaining power is the ability to extract a favorable outcome from negotiations due to one party’s strengths.

 Expropriation is the government’s confiscation of foreign assets.

 Obsolescing bargain is the deal struck by MNEs and host governments, which change their requirements after the initial FDI entry.

 Sunk cost is the cost that a firm has to endure even when its investment turns out to be unsatisfactory.

VIII. DEBATES AND EXTENSIONS

1. Key Concept

The first debate deals with whether FDI should be undertaken as opposed to outsourcing. The second debate focuses on whether recent anti-FDI incidents represent mere aberrations in the larger environment of having FDI friendlier policies or represent some routine occurrences in the future.

2. Key Term

 Sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets.

IX. MANAGEMENT SAVVY

1. Key Concept Managers should carefully assess whether FDI is justified, in light of other options such as outsourcing and licensing. Pay careful attention to the location advantages in combination with the firm’s strategic goals. Be aware of the institutional constraints governing FDI and enhance legitimacy in host countries.

2. Key Terms

None

END-OF-CHAPTER GUIDE

*Review Questions and Answers

*Critical Discussion Questions and Answers

*Global Action

*Closing Case

REVIEW QUESTIONS AND ANSWERS

1. What is the primary difference between FDI and FPI?

Foreign direct investment (FDI) is investing in, controlling, and managing value-added activities in other countries. Foreign portfolio investment (FPI) refers to investment in a portfolio of foreign securities such as stocks and bonds that do not entail the active management of foreign assets.

2. Why does the resource-based view suggest that the key word of FDI is direct?

The key word in FDI is D (direct) the direct hands-on management of foreign assets.

3. How does horizontal FDI compare to vertical FDI?

Horizontal FDI: a type of FDI in which a firm duplicates its home country-based activities at the same value chain stage in a host country

Vertical FDI: a type of FDI in which a firm moves upstream or downstream at different value chain stages in a host country

4. How does internationalization help combat market imperfections and failures?

Internalization replaces cross-border markets with one firm located in two or more countries as a response to market imperfections and failures.

5. Briefly summarize each of the three OLI advantages. OLI advantages: ownership (O) advantages, location (L) advantages, and internalization (I) advantages.

Ownership refers to an MNE’s possession and leveraging of certain valuable, rare, hardto-imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI Location refers to advantages enjoyed by firms operating in a certain location. Internalization refers to the replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries.

6. Discuss the pros and cons of FDI versus licensing. FDI reduces dissemination risks, provides tight control over foreign operations, and facilitates the transfer of tacit knowledge through “learning by doing.” Licensing reduces the amount of fixed investment needed to expand but it also leaves one vulnerable to limitations of the licensee

7. Identify your own example of agglomeration that demonstrates your understanding of the concept.

Agglomeration is the clustering of economic activities in certain locations. In regards to the examples, the important thing is not so much the answer as the extent to which the student demonstrates thought in providing the answer.

8. Compare and contrast the three political views of FDI. The radical view is hostile to FDI. Tracing its roots to Marxism, the radical view treats FDI as an instrument of imperialism and as a vehicle for exploitation of domestic resources by foreign capitalists and firms. The free market view suggests that FDI, unrestricted by government intervention, will enable countries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services. Most countries practice pragmatic nationalism viewing FDI as having both pros and cons and only approving FDI when its benefits outweigh costs

9. Describe two benefits and two costs to a host country of FDI and to a home country of FDI.

Host country benefits include the capital inflow that can help improve a host country’s balance of payments and technology spillovers (from foreign technology) that are diffused domestically. Such spillovers may produce a demonstration effect (sometimes also called the contagion or imitation) effect: the reaction of local firms to rise to the challenge demonstrated by MNEs through learning and imitation. Advanced management know-how may be highly valued. FDI also creates jobs. Primary costs of FDI to host countries include loss of sovereignty, and adverse effects on competition. Home country benefits include repatriated earnings from FDI, increased exports of components to host countries, and learning from FDI operations. Home country costs include capital outflow and loss of jobs.

10. Given that outsourcing is a viable alternative to FDI, what issues should be considered before a firm decides between the two?

The answer boils down to (1) how critical the activity being considered to perform abroad is to the core mission of the firm, (2) how common the activity is being undertaken by multiple end-user industries, and (3) how readily available the overseas talents to perform this activity are.

11. ON CULTURE: Many people in the United States are opposed to both outsourcing and FDI. Would it be easier to get such people to accept one of these alternatives, and if so, which one? Why or why not?

The important thing is not so much the answer as the extent to which the student demonstrates thought in providing the answer. Many who are opposed to both simply do not want the products of U.S. based companies produced anywhere other than the U.S. regardless of whether it involves outsourcing or FDI. Some may object more to FDI because it involves not only the immediate production jobs but also may involve jobs regarding establishment of production facilities and a greater permanent commitment to production overseas.

12. Why do some countries object to inbound FDI?

At the heart of these debates is the age-old question discussed earlier: Can we trust foreigners and foreign firms in making decisions important to our economy?

13. In the United States, many states and cities deliberately seek investment in their states and communities by firms from other parts of the country. Why are some of those who seek investment from elsewhere in the U.S. worried about investment from overseas?

The important thing is not so much the answer as the extent to which the student demonstrates thought in providing the answer. Again, students should consider the question of trusting foreigners and foreign firms in making decisions important to our economy.

14. What issues should a savvy manager consider when evaluating a particular location for FDI?

The quest for location advantages has to fit with the firm’s strategic goals. A given location that might seem to be advantageous due to low labor costs might not be advantageous in terms of the skills or other resources that are needed. If a firm is searching for the best “hot spots” for innovations, certain low-cost locations that do not generate sufficient innovations will not become very attractive.

15. Some Americans feel that U.S.-based firms should not undertake FDI in other countries because it results in expanding business opportunities in those countries and does not benefit the United States. How may the data on PengAtlas Map 2.3 be used to refute that view?

The U.S. not only is engaged in FDI in other countries, it is also the recipient of FDI.

16. Consider PengAtlas Map 2.3 showing U.S. FDI, and then look at PengAtlas Maps 2.1 and 2.2. Given the possibility that some U.S. imports are from operations in which U.S. firms have made FDI, how does that affect your view of the US trade deficit? Does it make the deficit seem like less of a problem or greater? Explain your answer. The important thing is not so much the answer as the extent to which the student demonstrates thought in providing the answer. To the extent that the FDI has resulted in importing what might otherwise have produced in the U.S., some will feel that it hurts jobs but others may point out that the reason for such overseas production is that it offers the U.S. consumer benefits in terms of lower prices and/or higher quality.

17. In questions 12, 13, and 15, we have noted controversies regarding FDI in terms of both inflows and outflows. Regarding PengAtlas Map 2.3, public concern about FDI often focuses on the FDI of U.S.-based companies, and some argue that investment going overseas may otherwise have occurred within the U.S. However, the map also shows that the U.S. is a major recipient of such investment from overseas but some who oppose FDI outflows also oppose FDI inflows. They fear that the United States is losing control over its economy as a result of such inflows. Do you think the two views are compatible? Why or why not?

The important thing is not so much the answer as the extent to which the student demonstrates thought in providing the answer. Those who view exports, imports and international investment (FDI) as desirable will feel that the two views are compatible only in that the views do not recognize the value or international transactions – they may be economic isolationists. Others will see the concerns as issues of involving loss to a foreign country – loss of jobs or loss of control over domestic production.

CRITICAL DISCUSSION QUESTIONS AND ANSWERS

1. Identify the top five (or ten) source countries of FDI into your country. Then identify the top ten (or 20) foreign MNEs that have undertaken inbound FDI in your country. Why do these countries and companies provide the bulk of FDI into your country? This is a question in which the answer is not as important as the thought process and the ability to clearly articulate and document the answers.

2. Identify the top five (or ten) recipient countries of FDI from your country. Then identify the top ten (or 20) MNEs headquartered in your country that have made outbound FDI elsewhere. Why do these countries attract FDI from the top MNEs from your country? This is a question in which the answer is not as important as the thought process and the ability to clearly articulate and document the answers.

3. ON ETHICS: Undertaking FDI, by definition, means not investing in the MNE’s home country. What are the ethical dilemmas here? What are your recommendations, as (1) MNE executives, (2) labor union leaders of your domestic (home country) labor forces, or (3) host country officials? Again, this is a question in which the answer is not as important as the thought process and the ability to clearly articulate. However, in discussing this question, you might use comments in the General Teaching Suggestions and the Opening Case Discussion Guide.

GLOBAL ACTION

1. Your MNE is looking to evaluate the industrial capability of various locations worldwide. Based on readily available data concerning the potential and performance of different countries, the information you provide will drive future investment by your company. Choose a country from Asia, Europe, North America, and South America and summarize your findings about each.

Of the four countries from four continents, how would you rank them? Why?

Exercise 1 Answers

One resource which can be used is “Global-production.com”. This website can be found by entering the search term “global production” at the globalEDGE™ Resource Desk search box located at http://globaledge.msu.edu/resourceDesk/. At the website, choose one country for Asia, Europe, North America, and South America. When evaluating each country, students may choose any of the four individual Industrial Capacity measures (skill base, R&D capacity, infrastructure, or government) as well as the overall measure (all indicators). Vigorous discussion may result upon comparison of these countries across the different individual measures.

Search Term: “global production”

Resource Name: Global-production.com

Website: http://www.global-production.com/ globalEDGE™ Tag: Rankings

2. The main premise for development at your company in the coming years is to shift its offshore services to Africa. As such, you have been asked to develop a report that evaluates which African countries have increased the possibility of creating a long-term advantage for your company. Also, be sure to include the African countries that have decreased their capacity to create a long-term advantage. Can you generate a top-five list and a bottom-five list from Africa for this purpose?

Exercise 2 Answers

One resource which can be used is “A.T. Kearney: The Global Services Location Index”. This website can be found by entering the search term “offshore services” at the globalEDGE™ Resource Desk search box located at http://globaledge.msu.edu/resourceDesk/. Once at the website, select and view the report Then, scroll through the report for an evaluation of the countries. The measures used to determine the index belong in three main categories (with the appropriate subcategories): financial attractiveness (compensation costs, infrastructure costs, and tax and regulatory costs), people and skills availability (remote services sector experience and quality ratings, labor force availability, education and language, and attrition risk), and business environment (country environment, infrastructure, cultural exposure, and security of intellectual property).

Search Term: “offshore services”

Resource Name: A.T. Kearney: The Global Services Location Index

Website: http://www.atkearney.com/index.php/Publications/global-services-locationindex.html

globalEDGE™ Tag: Rankings

CLOSING CASE DISCUSSION GUIDE AND ANSWERS

Emerging Markets: Automobile FDI in Braziland Mexico

1. What are the costs and benefits of FDI inflows for a host country such as Brazil and Mexico?

Brazil cost: high cost of living; expensive to conduct business; automobile industry can’t stand alone

Brazil benefit: industry growth; innovation is supported (ethanol); generated opportunity in local businesses

Mexico cost: not fostered domestic suppliers; industry innovation limited; Mexico benefit: leveraging low-cost labor; export hub; modern infrastructure

2. If you were an executive working for an emerging automaker from China or India, assuming your firm only has the ability to enter one Latin American country for the time being, which country would you recommend: Brazil or Mexico? The important thing is not so much the answer as the extent to which the student demonstrates thought in providing the answer.

3. The automobile industry in both Brazil and Mexico is thriving. If you were a government official from an African country (such as Morocco, Nigeria, or South Africa) who has visited both countries and has been very impressed, which approach would you recommend to your own government interested in attracting FDI from global automakers: the Brazilian approach or the Mexican approach? Why?

The important thing is not so much the answer as the extent to which the student demonstrates thought in providing the answer.