BU669 Session 2

Negotiating FDI Relationships & Offshoring

Foreign Direct Investment

• Growing importance – growth in capital flow > growth in flow of goods & services

• Inter-company product flows account for significant share of countries exports & imports

• Developed to developing countries• MNE still drive a lot of the action• Stakeholders – governments, MNE, local

companies• Simulation – window into the dynamics

Players in Negotiations

• 3 Multinationals – Megatronics, Eurodata, Tanaka

• 1 Government– China – but local governments as well

• 2 local companies – Majestic, Shanghai Information Age Technologies

Issues For Individual Players

• MNCs – China? Type & size of Plant?

• Local Companies – Enter industry? Alone or Partner? Plant type & size?

• Government – Industry structure & ownership to allow? Incentives? Economic development?

Issues Between MNCs & Local Companies

• License, subcontract, JV, other?

• Ownership %s

• Mg’t responsibilities & Control

• Technology transfer

• Local market or export

• Size & Type of plant

• Transfer pricing – imports/exports

Issues Between MNCs & Government

• Plant size & type• Location• Infrastructure development & support• Number of manufacturers allowed• Tariff protection• Foreign ownership allowed• Technology transfer conditions• Pricing regulations• Export and local content requirements• Tax & financial incentives• Repatriation of profits

Contributions of MNEs

11-9

Issues Between Local Companies & Governments

• Incentives & Special consideration

• Degree of support with MNCs

• Number of manufacturers

• Tariff Protection

• Tax, financial & export incentives

• Plant location

Issues Between Local Companies

• Cooperate or compete

• If cooperate – independent or joint operations?

Issues Between Governments

• Cooperate or compete?

• Free Trade?

Part Two

Off-shoring

Canadian Industry Punching Out – Stronger Dollar and Low-cost Alternatives are sending

Jobs Offshore – G&M Jan23, 2004• Nortel – 1500 jobs• Levis Strauss & Company – 1200 jobs• Bauer Nike Hockey – 321 jobs• Camco (refrigerators & stoves) – 800 jobs• Roots – 200 jobs• Swift Denim – 600 jobs• International - Multi-foods – 135 jobs• Canam Manac (truck trailers) – 245 jobs

Is Your Job Next?

• By 2015 – roughly 3.3 million U.S. business processing jobs will have moved offshore

• U.S. service jobs lost to offshoring will increase at a rate of 30% to 40% over next five years

• Software developers - $60/hr in U.S. vs $6/hr in India

Is offshoring a good thing or not? For Canada?

Offshoring’s Value to India

Benefit per $1 of U.S. off-shore Spending in 2002• Offshoring Sector Labour 0.10

Profits 0.10• Local Suppliers 0.09• Government Taxes Central 0.03

State 0.01• Net Benefit $0.33

Example: Call Centre in India

Foreign Direct Investment’s Effect on Developing countries

Competition Boosts Productivity

Exploding the Myths of Offshoring – Mckinsey June 2004

Benefits to NA• Corporate savings• Deal for consumers• Additional exports• Repatriated profits• Productivity & new jobs???• Challenge – address those displaced in the

transition

Don’t Blame Trade for US Job Losses – Mckinsey 2005

• 2.85 mil manufacturing jobs lost in US during 2000-2003 Why?

• 11% or 314,000 due to trade – offshore imports• Real contributor – weak domestic demand, rapid

productivity growth, dollar’s strength which hurt exports

• Solutions – stimulate domestic demand, cut deficit,push countries with artificially cheap currencies to appreciate against the US$, trade-adjustment-assistance programs

Another Concern – Innovation Blowback

• Wal-Mart stores imports from China – 1% of GDP – company is helping Chinese manufacturers target shoppers in US & Europe

• Citigroups Chinese M&A unit – outbound deals make up lion share of its pipeline

• Western companies serving low-income customers in emerging markets are using that experience to address needs of value segments in developed markets

Product & Process Innovation to Address Broader Emerging Market Needs

• Production-driven modularity – process networks – e.g., motorcycles

• Customer-driven modularity – Cummins engines/generators

• Process-driven services – Aravind Eye Care System in India

• Key message to Westerners – if you are participating in the mass-market segment of emerging economies, you are not developing the capabilities you will need to compete at home

Summary

• FDI importance & impact

• Stakeholders involved & perspectives

• Negotiations & Deal Structuring

• Off-shoring – strategic fit, economic impact – micro & macro

• Next Day – China seminars