FDI Concepts Foreign Direct Investment

changes last made to this page 2007 Dec 03 - added Scotibank office in Moscow
 

LEARNING OBJECTIVES

The main themes that we will discuss are Case Studies of FDI Bridgestone/Firestone Tire - automotive industry Quebecor World Inc. - printing and publishing Scotiabank in Mexico - financial services Government control Investor's control: concerns of the risk they face Methods and ways of acquiring FDI FDI motivations to achieve sales expansion FDI motivations to acquire resources Minimizing Risk Global players, and patterns in FDI

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Case Study: Bridgestone /Firestone Tire

Many international business textbooks use Case Studies at the beginning of chapters in order to explain a theme by example - it is often the best methods of getting across the critical points. The text originally used by C44 discussed Bridgestone/Firestone.  Firestone was a well known American tire manufacturing company. Bridgestone is a well known Japanese tire manufacturing company. "Shojiro Ishibashi, established the Bridgestone Tire Corporation in Japan in 1931. Mr. Ishbashi took the direct English translation of his family name -"Stone-bridge" and reversed it to create "Bridgestone. This name sounded like Firestone, a company he greatly admired." see  www.bridgestone-firestone.ca/eng/history/default.asp As Japanese auto companies began to develop FDI situations in North America in the 1980's, the Japanese companies supplying parts and accessories, for cars, also began to seek out FDI in the U.S. and Canada. Firestone Inc. was acquired for $2.6 billion in 1988 by Bridgestone Corp. of Japan, which invested another $1.5 billion modernizing Firestone factories. Bridgestone / Firestone then began to sell tires to the Japanese auto assembly plants in the U.S., as well as to the existing customers of the old Firestone corporation. By selling tires in the U.S. (made in the U.S.) to Japanese assemblers, Bridgestone / Firestone could avoid circumstances of tariffs or 4X [foreign exchange] problems. WTGR

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Case Study: Bridgestone /Firestone Tire

The former C44 text was written before the summer of 2000 and so the authors could not have forecast the interesting coincidence of noting Bridgestone/Firestone - which ended up getting very bad publicity because many Ford SUVs carrying Bridgestone tires were crashing and killing people.  The allegations that Bridgestone had manufactured a bunch of "bad tires" was discussed widely in the press in 2000 and 2001. Bridgestone said it was the fault of Ford's design for the SUVs that carried the tires, Ford said it was the fault of Bridgestone which was accused of cutting costs in materials and assembly which saved money, but produced an unsafe tire. The tires were Bridgestone/Firestone 225/70R15 Wilderness AT. One of the biggest complaints special interest groups have against foreign investment in consumer products is that the foreign investor will creat unsafe situations out of a desire to save money and recover the cost of the investment. The case of Bridgestone/Firestone turned nasty because the company was accused of continuing to sell the 225/70R15 Wilderness AT's in other parts of the world after they withdrew them from the North American market. Disclaimer: For the record, Prof. Richardson owns a Ford Truck which came with Bridgestone/Firestone 225/70R15 Wilderness tires and he might not be entirely objective about the company !! WTGR

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Case Study: Bridgestone/Firestone Aside from the negative media coverage of Bridgestone/Firestone, (summer of 2000) the case study of why, and how Bridgestone investment in Firestone serves as a good example of FDI since it covers the main categories.

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• FDI to grow the company worldwide
• Enhacing capability in the U.S. would enhance the capability of Bridgestone globally since the U.S. is a key driver of the world-wide automotive market
• FDI to avoid trade barriers
• Bridgestone bought Firestone so that it could manufacture tires in the U.S.A. for Japanese automakers selling vehicles to Americans
• FDI as a result of following your customer
• Bridgestone had been selling tires to the major Japanese auto assemblers and when these assemblers set up plants in the U.S.A. and Canada, Bridgestone followed in order to maintain those customers and not lose them to other tire manufacturers
• FDI to avoid 4X disadvantage
• When the Japanese yen rose against the U.S. dollar in the mid-1980's, it became more expensive to import Japanese tires into the U.S.A. If tires were made in the U.S.A. and sold to Japanese customers in the U.S.A., Bridgestone could avoid the cost of a high Yen/Dollar currency exchange rate
• FDI to take advantage of a 4X advantage
• When the Japanese yen rose against the U.S. dollar in the mid-1980's, it also meant that Japanese business people had more money to "buy dollars" and therefore investing in the U.S.A. became comparitively cheaper because of the higher Yen
• FDI to "buy" marketshare
• If a company considers it financially expensive to compete with a local strong brand, one of the solutions is to buy a local brand in that country which is the same as "buying" local marketshare
• FDI to acquire local management expertise
Given a choice between opening up their own operation run by Japanese, or having an operation run by Americans - who knew the U.S.A. market, Bridgestone considered it wiser to buy Firestone since it would instantly give them access to a U.S.A. management team
• FDI's effect on local jobs
• One of the consequences of a foreign aquisition is the tendancy for the new foreign owners to want to try to increase productivity and cut costs. The most common way of cutting costs is to cut the numbers of employees and make the existing employees work harder and produce more. "In 1979 about 127,000 Americans worked in tire manufacturing. In 1983 the figure was just 94,000, by 1994 it averaged 81,300. Yet these 81,300 tire workers managed to produce a record 260 million tires. In fact, 36% fewer workers made 17% more tires" said Daniel Akst, Los Angeles Times Magazine
• the main reason why the Quebec government agreed to support the expansion of the plant in Joliette was because 1,250 jobs were at stake if this facility did not become more competitive
• FDI's supported by host government support
• Sometimes the decision to carry out an FDI situation, or expand an existing situation , depends on any financial support provided by the host government.
• This support can be in the form of corporate tax concessions, or an outright financial contribution, like the example in Quebec in Nov 2005.

Update 2005

A story in the newspaper in November 2005 explained that the Quebec government is financially supporting an expansion of the Bridgestone-Firestone Canada plant northeast of Montreal near Joliette. Bridgestone-Firestone will contribute $49.8 million and the Quebec gov't will contribute $3.5 million for the expansion which is intended to maintain 1,250 jobs. Bridgestone said "the tire industry has changed significantly because of globalization, automation and diversity of demand." The investment is intended to allow the company to make high-performance and large-diameter tires. When the Quebec government announced their contribution to the expansion, Economic Development Minister Claude Bechard said "this will reinforce the competitiveness of Bridgestone-Firestone", which he described as "a valuable contributor to the economic health of the region." The Joliette plant, founded in 1965, makes 16,000 tires per day

Case Study:  Following  the  customer Scotiabank in Russia

Scotia bank opens office in Moscow An example of FDI as a result of following your customer Scotiabank announced in late November 2007 that they have a received a license from Russian regulators to open a representative office in Moscow. Scotiabank, in talking about this expansion, boated that "we will be the only Canadian bank to have on-the-ground presence in BRIC - Brazil Russia India and China" In a statement clearing citing an example of "following the customer" Scotiabank said "strong Canadian companies, such as Magna and Kinross Gold are expanding their presence in the Russian market and our office in Moscow will enable us to provide direct, relevant support to them..."

Case Study:  FDI supported  by host  government  support Scotiabank in Russia

Scotia bank opens office in Moscow An example of FDI supported by host government support When Scotiabank announced in late November 2007 that they have a received a license from Russian regulators to open a representative office in Moscow their press release noted http://micro.newswire.ca/release.cgi?rkey=1511294557&view=85223-0&Start=0   "I am very pleased to welcome Scotiabank to Russia," said Russian Ambassador to Canada Georgiy Mamedov. "Today's announcement coincides with the arrival of Mr. Victor Zubkov, Prime Minister of the Government of the Russian Federation as part of ongoing discussions with the Canadian government and Canadian companies aimed at exploring opportunities for Russians and Canadians to work together. We look forward to working with Scotiabank as they establish a presence in Moscow." Getting the Russian Ambassador to make positive comment about the FDI is as high as you can go in obtaining Host Government Support

click to access the short unit on UNCTAD

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see also www.witiger.com/internationalbusiness/CDNFDIexamples.htm

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