4 Foreign direct investment

Question 1

2 kinds of international investment

Answer 1

foreign portfolio investment: stock & bonds without the active management of foreign assets = foreign indirect interment

foreign direct investment: involving an equity stake of 10% or more in a foreign based enterprise

Question 2

Horizontal FDI

Answer 2

duplicate its home country-based activities at the same value chain stage in a host country

Question 3

Vertical FDI

Answer 3

firm moves upstream or downstram in different value chain stages in a host country by way of FDI

Question 4

FDI flow

Answer 4

amount of FDI moving in a give period in a certain direction

Question 5

FDI inflow

Answer 5

inbound FDI moving into a country

Question 6

FDI outflow

Answer 6

outbound FDI moving out of a country

Question 7

FDI stock

Answer 7

value of foreign owned firm operating in a country, or controlled by a country’s firms abroad

Question 8

Multinational enterprises / MNE =

Answer 8

firm that engages in FDI

non-MNE firms can also do business abroad but don’t angles FDI

Question 9

why engage FDI

Answer 9

OLI paradigm opposes that FDI in the most appropriate from of IB if 3 condition are met
O-advantages
L-advantages
I-advantages

Question 10

Ownership advantages (O)

Answer 10

• Resources of the firm that can be export, and enable the firm to attain competitive advantages abroad
• sharing of resources across business units
• capabilities arising from combining business units in multiple counties

Question 11

Locational advantages (L)

Answer 11

Advantages enjoyes by firms operating in certain locations
Market location-bound resources, agglomeration, instructions

are not statics

Question 12

Internalization advantage (I)

Answer 12

advantages of organizing activities within a multinational firm rather than using a market transaction

Question 13

market as L advantages - why to establish FDI and not just export

Answer 13

• protectionism: jumping over protectionist barriers
• transportation costs: continue to ba a major barrier to trade in some industries , local production allows serving markets at lower costs.
• direct interaction with the customers
• production and sale of some services cannot be physically separate

Question 14

Resources as L advantage

Answer 14

specific country: natural resources, human capital, infrastructures

Question 15

agglomeration as L-advantages

Answer 15

agglomeration: clustering of economic activities in certain location especially important for business seeking innovation

knowledge diffused form one firm to other
skilled labor force
poll of specialized suppliers & buyer also in the region

Question 16

institution as L-advantages

Answer 16

clear and simple rules
low level of corruption
efficient bureaucracy

Question 17

Key advantage of FDI over other methods

Answer 17

ability to replace external market relationship with one firm (MNE)
owning, controlling and managing activities in two or more countries

Question 18

FDI vs exporting

Answer 18

Replacing external market relationship with a single organization spanning both counties –> the MNEs thus reduces cross border transaction costs & increase efficiencies –> I advantages

Question 19

FDI vs Licensing

Answer 19

FDI affords a high degree of managerial control that reduces the risk of risk specific resources & capabilities being opportunistically take advantage of: dissemination risk (unauthorized diffusion of firm specific know-how)

certain type of knowledge may be to difficult to transfer to license without FDI

FDI provides more direct & higher control over foreign operations

Question 20

FDI vs offshore outsourcing

Answer 20

3 types of problem with offshore outsourcing

• hold up problem due to asset specificity
• unauthorized dissemination of technology
• costs of monitoring quality & standards

Question 21

national insinuation and FDI: host country institution

Answer 21

consensus is that FDI leads to a win-win situation for both home and host country

most country retain some institution that either restrict the presence of FDI, regulate the operation of FDI

Question 22

host country restrictive institutions - outright bans of FDI

Answer 22

Rule out FDI completely, either for the entire economy or for specific sectors
were common in developing economies, rare by the 1990s

Question 23

host country restrictive institutions - case by case approvals of FDI

Answer 23

make every FDI subject to a registration and approval process

Question 24

host country restrictive institutions - ownership requirements

Answer 24

a specific form of restriction that disallow full foreign ownership bit allows foreign investors to operate in a county if they establish a Join venture with a local firm

Question 25

Host country regulation institution - FDI specific regulation

Answer 25

some counties make the operation of FDI subject to specific regulation
for ex. local content requirement require a certain proportion of the values of the goods make in the country to originate form that country

Question 26

Benefits of FDI

Answer 26

Consumers:
access to international quality product and brands
lower prices due to economics of scale & competition

Suppliers:
technology transfer enhancing productivity
opportunity to become an internal supplier

Competitors:
technology spillovers enable learning
competition may trigger upgrading & innovation

Workers:
employment opportunité
higher labour standard than local firms
training & knowledge transfer

Government:
tax revenues
economic growth

Natural environment
MEN often have higher environmental standards than local firms

Question 27

negative effect of FDI

Answer 27

consumers: reduces variety or traditional local brands (if local firm are crowded out)
suppliers: crowding out by international sourcing
competitors: crowding out by overwhelming competition
workers: often less labor intensive production than local firms
government: costs of subsidies & other incentives

natural environment: MNEs may locate high polluting activities in place with less stringent regulations

Question 28

shifting barraging power in stage

Answer 28

stage 1: MNE & government negotiate a deal that involves assurances of property right & incentives
stage 2: MNE makes its interment by building the bridge or power plan, in the expectation of recovering the investments from future revenue streams
stage 3: the MNE sells its services & thus recovers its interment & after may earn profits. observing such protist along with perceived high prices for electric or bridge tolls. domestic political group may pressurize government to renegotiation the deal that seems to yield eccessive profit to the foreign firm.
Government’s tactics include changing rules applying to pricing of electric or bridge tolls, demanding a higher share of profits & taxes or even confiscating foreign assets, in other words: extrapolation

Question 29

how MNEs and host movement bargain

Answer 29

large firm & small firms acting together may have some power to influence institution & political processes

the bargaining between MNEs and FDI is characterized by the tress Cs’:
common interest, conflicting interest & compromises

Question 30

Severing wealth funds

Answer 30

SWF: state owned investment fund of financial asset such a stock, bonds, real estate or other financial instruments funded by foreign exchange assets

Most SWFs make relatively passive Foreign Portfolio investment
Some SWF undertake FDI - become more active, direct investors as they hold larges stage in recipients.

Question 31

Differences SWF and Mne

Answer 31

SWF: state owned or controlled
may acquire equity stakes sufficient to influence target forms, yet they do not gel involved in day to day management or integrate operations

Question 32

SWF debate

Answer 32

may be politically motivated
inadequate transparency
some SWF suffered losses form their investments during the 2008-2009