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International Investment:
Theory and Practice
Warren Buffett
God of Stocks
George Soros
Greatest Money Manager
Case:
Nestls Global Drive
(1) How does Nestl display basic characteristics of the
Multinational Enterprise (MNE)?
(2) Whats the motive for Nestl to invest in other
countries? Generally speaking, what are different
motives for the MNEs to make FDI? Explain.
Motives:
To seek
(1) market;
(2) cheap labor;
(3) raw materials;
(4) information and technology;
(5) free trade;
(6) tax reduction.
Caribbean
(BVI)
Case Study
Aflacs Success in Japan
Discussion Questions:
1. Based on Aflacs experience, what
conditions should a firm have to make
foreign direct investment in a foreign
country?
2. Can its success be duplicated in China?
Case: Aflac
Q. 1. Based on Aflacs experience, what conditions
should a firm have to make FDI?
Answer:
1. (1) Ownership Advantage:
The firm possesses proprietary knowledge
(2) Location Advantage:
Japan is a well-developed economy. Income and
purchasing power are high. Besides, in-house sales
subsidiaries in Japanese corporations can be set up to
handle insurance sales.
(3) Internalization Advantage
Aflac cannot realize full value of its proprietary asset
through market transactions like franchising.
2. Succeed in China?
Application: Porters Diamond Model
Government
Factor Conditions
Demand Conditions
Chance
Factor Conditions
plenty human resources,
low cost, good infra.
modern communication
Demand Conditions
more civilian-run firms, rising
income, medical system reform
credible foreign insurance
Chance
Case: Aflac
Q (ii) Can its success be duplicated in China?
Compare:
Factor conditions:
+
Firm structure & rivalry
0
Demand:
+
Supporting industries:
+
Government:
Chance:
+
On the whole, there are location advantages.
In addition, Aflac has a proven business model. Thus,
success is very likely.
Theoretical Issue:
FDI as a Currency Area Phenomenon
According to Aliber, a financial economist:
Foreign direct investment is a currency
area phenomenon.
Firms in countries with strong currencies
have a currency-area advantage. They can
acquire foreign firms and production facilities
at low costs in countries with weak currencies.
Recapitulation:
International Portfolio Investment differs from FDI;
Investment and speculation have different characteristics;
MNE can take various legal organization forms;
Main motivations for FDI are seeking resources, markets,
and efficiency;
Mode of entry into a foreign market is an important
strategic decision (Kodak);
OLI advantages theory offers a guideline for making FDI
decision;
Porters diamond model provides a useful framework for
evaluating location advantages.
Reminder:
After the class discussion of the case, you
can receive bonus points if a short report is
submitted. It should compare analyses of the
professor and others with yours. New ideas may
also be provided. This report is not required, but
you are encouraged to do so.
If you want to do the report, it should be
submitted at the beginning of the next class. An
electronic copy should also be sent to TA and
my e-mail box before the next class.
Note:
Learning is an exciting journey of new
discoveries!