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Foreign Direct Investment
Transcript of Foreign Direct Investment
Intel: world’s leading semiconductor company
Headquartered in the US
Products: microprocessors, motherboard chipsets, network cards etc.
In 2009, Intel employed 79,800 people and its sales were $35.1 billion
skilled-labor-intensive part of the production process = developed countries
unskilled-labor intensive part = developing countries Examples of Vertical FDI FDI: company starts their business from scratch in a foreign place
Direct ownership and control
Extraction of raw materials
Low cost resources
Penetrate new markets
GDP = C + I + G + (X-M) Foreign Direct Investment Definition: The transfer of portions of a business to another country
When did this become popular?
80’s and 90’s; with industrialization and globalization
What countries tend to be involved in outsourcing the most?
US, China (production), India (service)
What sectors tend to be most involved in outsourcing?
IT, customer service, factory jobs (technology production) History of Outsourcing http://www.superteachertools.com/jeopardy/usergames/Dec201248/game1354466814.php Jeopardy! FREE TRADE or FAIR TRADE?
Cheaper goods or no job?
Expensive prices or a job?
Horrible working conditions for others or cheaper goods?
Both Free and Fair trade have pros and cons. Will there every be a happy medium? The Ongoing Debate Hecksher-Ohlin Theory: Owners of a country’s abundant factors gain from trade, but owners of a country’s scarce factors lose.
Low skilled workers in the U.S. lose because they are scarce (there work goes to other countries) but high skilled workers are abundant and they become better off
Economists say, aim to make all workers high-skilled. Is that possible? Other Theories PROTECTIONISM DISCOURAGES OUTSOURCING and protects those people hurt by free trade!
Puts a limit on trade in the form of a TARIFF—therefore limiting outsourcing
Disadvantages of Tariffs
Consumer losses are larger than producers benefits!
Advantages of Tariffs
The surplus of money goes directly to the producers of the good FAIR TRADE Ricardian Model: Everyone is better off with trade there force outsource what you have the comparative advantage in!
BUT, do the societal gains spread evenly? OR does free trade lead to income inequality?
WHO GETS THE $$$$?
How does this affect unemployment in the U.S.?
People are laid off of their jobs but economists say this will ultimately strengthen the U.S. economy FREE TRADE Free Trade: policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports) or quotas
When we trade (whether that be actual products or labor and capital) both countries will be better off if they produce what they have the comparative advantage in, a lesson we learn in the Ricardian model
Fair Trade (Protectionism): an organized social movement that aims to help producers in developing countries to make better trading conditions and promote sustainability.
When we trade with those with low wages and working standards, we are keeping them down there
They need protection in the form of tariffs and other policies so that their welfare can increase
WHICH POLICY DO YOU THINK IS BEST?
ABC News 20 20 Is outsourcing Bad for America? Myth busted
Obama's anti-outsourcing ads could clinch his re-election (Nov 2012)
http://www.hindustantimes.com/Specials/Coverage/US-Elections-2012/Chunk-HT-UI-USElections2012-TopStories/Anti-outsourcing-stance-may-give-Barack-Obama-advantage/SP-Article10-955402.aspx FREE vs. FAIR trade The U.S. has outsourced a lot of production of goods to China
It is seen that the boom in China is directly related to outsourcing sent to China
U.S. sends work to China because the labor is cheaper and there are less regulations to uphold (especially environmental ones)
Other countries like Bangladesh & Cambodia have plenty cheap labor but the Chinese tend to be more skilled, better disciplined, and higher educated
The U.S. tends to outsource IT-enabled jobs to India
Has large amount of English speakers and has abundant and well qualified software engineer talent
We have also seen a boom in India’s economy China and India Backward Vertical FDI: multinational company invests or builds an operation abroad fulfills the role of a supplier
provides inputs for a firm’s domestic production processes
Seeking to improve cost of raw materials and production
Ex. one of the major materials used for car manufacturing is steel
Forward Vertical FDI: multinational company invests or builds an operation fulfills role of a distributor
when an industry abroad sells the outputs of a firm’s domestic production processes
less common than backward vertical FDI
ex. Toyota buys a car dealership in the United States Backward vs. Forward Vertical FDI: when a firm uses FDI to implement another value chain stage (ex. Apple production in China)
Driven by production cost difference
Locate each stage of production in the country where it can be done at the lowest cost Vertical FDI Ikea: world’s largest home furnishing retailer
Originated in Sweden
Products: Self-assembly furniture
Annual sales of more than 24.7 billion EURO
Mostly manufactured in developing countries
Suppliers in 50 countries Example of Horizontal FDI Horizontal FDI: when a firm duplicates its home activity in another country at the same value chain stage (ex. Ikea)
Driven by high trade costs associated with transportation
The bulk of FDI is horizontal rather than vertical
Plant-level fixed vs. trade Horizontal FDI What are the two types of FDI?? Foreign Direct Investment Increased capital investment
Increased investment of managerial and other resources
Greater exposure to the investment to political and financial risks
More subject to risk
Entering a foreign environment FDI Disadvantages Greater control
Avoid import quotas
Adapt product to local market
Improve local image FDI Advantages Political issue in the United States during
the 2004 presidential election Outsourcing in the US Pros
Greater flexibility and control
Brings in expertise
Quality of service
Language Skills Pros and Cons Reduce and control operating costs
Free internal assets for other purposes
Relocate time-consuming & tedious functions
Sufficient resources aren’t available internally
Gain access to world-class capabilities Why Outsource? Ali Cooke, Kendall Akey, Kelsey Markiewicz, Katy Compton Outsourcing, FDI &
Free vs. Fair trade Dyer, Martin. "The Effects of U.S. Outsourcing to China Martin Dyer." LSU. Web. 01 May 2012. <http://www.lsu.edu/faculty/jwither/Essays/Immigration_Trade/Dyer_Essay.html>.
Griffiths, Dave. "The Theory and Practice of Outsourcing." Kudos Information Ltd. Web. <www.inkoopportal.com/.../theory_and_parctice_of_outsourcing.pdf>.
Krugman, Paul R., and Maurice Obstfeld. International Economics. Harlow: Pearson Education, 2011. Print.
Otterman, Sharon. "Council on Foreign Relations." Council on Foreign Relations. 20 Feb. 2004. Web. http://www.cfr.org/pakistan/trade-outsourcing-jobs/p7749.
"Outsourcing: Where’s Uncle Sam?" The Debate Room. Bloomsberg Businessweek. Web. 1 May 2012.
Saleem, Hasan. "How Outsourcing Affects The U.S. Economy!" DirJournal. 16 Sept. 2008. Web. <http://www.dirjournal.com/business-journal/how-outsourcing-affects-the-us-economy/>. Bibliography Who gets the $$$? -Those who make computers in the U.S. and those who make roses in Columbia will thrive because people buy from them. However, the small group of people who make roses in the U.S. and computers in Columbia will be hurt because they do not have the comparative advantages and their products can not succeed in the market. We will explore this more when talking about the H-O model. The effects of free trade Fall 2012 Ali Cooke, Katy Compton, Kendall Akey and Kelsey Markiewicz