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MGT520 - International Business - Lecture Handout 34

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FOREIGN DIRECT INVESTMENT

RISK MINIMIZATION OBJECTIVES:

Diversification, internationally or otherwise, is often a means firms use to reduce risks.

Following Customers:

Suppliers will often set up facilities near the firms they supply. Bridgestone decided to make automobile tires in the United States in order to continue selling to Honda and Toyota once those companies initiated U.S. production.

Preventing Competitors’ Advantages:

Firms in an oligopolistic industry often follow their competitors into other countries in order to avoid giving a competitor an advantage.

Political Motives:

For example, during the early 1980s, the U.S. government instituted various incentives to increase the profitability of U.S. investment in Caribbean countries that were unfriendly to Castro’s regime.

ADVANTAGES OF FOREIGN DIRECT INVESTMENT:

Monopoly Advantages before Direct Investment:

Companies invest directly if they think they hold some supremacy over similar companies in countries of interest. The advantage results from a foreign company’s ownership of some resource—patents, management skills—unavailable at the same price to the local company. This edge is often called a monopoly advantage.

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MGT520 - International Business - Lecture Handout 25

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THE POLITICAL ECONOMY OF INTERNATIONAL TRADE

THE POLITICAL ENVIRONMENT:

The political environment can have a dramatic impact on the operations of a firm. U.S. managers may be accustomed to a stable political system and a relatively homogenous population. This is often not true in other countries. A political system integrates the parts of a society into a viable, functioning unit. Sometimes that is a very difficult task. A country’s political system influences how business is conducted domestically and internationally.

THE IMPACT OF THE POLITICAL SYSTEM ON MANAGEMENT DECISIONS:

Political Risk:

Political risk occurs when there is a possibility that the political climate in a foreign country will change in such a way that the operations of international companies in that country will deteriorate.

  • Types and causes of political risk: Types of political risk include government takeovers of property, operating restrictions, and agitation that damages the company’s performance. Such problems can be caused by changing opinions of political leadership, civil disorder, and changes in external relations (such as animosity between the home and host country governments.
  • Macro and micro political risks: If political actions are aimed only at specific foreign investments (e.g., a single foreign company), they are considered micro political risks. If they are aimed at a broad spectrum of foreign investors (e.g., when all foreign-owned private property was taken over by Cuba), they are considered macro political risks.

  • Read more: MGT520 - International Business - Lecture Handout 25