Global Business Today

Business

Quiz 8 :
Foreign Direct Investment

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Quiz 8 :
Foreign Direct Investment

Japan traditionally resisted FDI for many years and that a very restrictive set of rules for a long period of time. Even after 1990, when the government did remove some of the restrictions, FDI was very slow because of a few reasons like: 1) Japanese firms often resisted takeovers or mergers. They were afraid that their employee may be laid off or their long standing ties with their suppliers may be broken. 2) Japan had laws that prevented large retail stores from opening. This was to protect a few small retailers who were politically powerful. This law was repealed in 1994. 3) Foreign companies found it difficult to hire managers in Japan. This is because of the Japanese culture of staying with one company for one's entire life. 4) Also, the slow economic growth and sluggish economic spending did not make Japan an attractive destination. These were some of the reasons for the relatively very slow FDI inflows into Japan among all the developed nations.

The fact that Ireland's FDI inflows accounted for 63.7 percent of its gross fixed capital formation while it accounted for only 4.1 percent in Japan shows the following: 1) Ireland has more FDI-friendly regulations than Japan. It offers better climate for inward FDI than Japan. 2) Ireland probably started from a low base of gross fixed capital. Hence, the percentages are higher. 3) Ireland had more of "greenfield" investments than Japan whereas in Japan they could have been more of JVs or Mergers and Acquisitions. Therefore, in Ireland more of new fixed assets were created rather than in Japan where existing assets were taken over.

FDI is preferred over licensing under the following circumstances: 1) In high-technology industries where the intellectual property (IP) value is high. Here under licensing, there is always the fear of the IP being either stolen or misappropriated. 2) In global oligopolies, where the competitive interdependence relies on the firms maintaining a strict control on their foreign subsidiaries. This is to enable to launch a coordinated attack on other foreign competitors. 3) In industries where the cost pressure is always high. Here it is essential to maintain a control on the foreign operations so that the production facilities could be dispersed to various global locations in order to take advantage of the cost differentials to control overall costs. 4) In firms where the competitive advantage is based on the knowledge pool of the management and the business processes rather than just pure technology and product excellence. This cannot be licensed in the form of an "operational manual".